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In this paper, the Taylor rule and the Keynesian monetary policy rules recently introduced by Atesoglu are empirically compared for the 1994:2-2007:4 period. The findings reveal that the Atesoglu rule and the inflation-augmented A...
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In this paper, the Taylor rule and the Keynesian monetary policy rules recently introduced by Atesoglu are empirically compared for the 1994:2-2007:4 period. The findings reveal that the Atesoglu rule and the inflation-augmented Atesoglu rule are able to provide a better explanation of the federal funds rate than the Taylor rule. Results suggest that the Atesoglu rules based on the neutral interest rate idea of Keynes are likely to provide better predictions of future developments in monetary policy.
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This essay examines the challenges in devising rules for unconventional monetary policy suitable for a post-crisis world. It is argued that unconventional monetary policy instruments are a poor substitute for conventional interest...
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This essay examines the challenges in devising rules for unconventional monetary policy suitable for a post-crisis world. It is argued that unconventional monetary policy instruments are a poor substitute for conventional interest-rate policy in stabilizing the economy and in insulating monetary policy from political pressures. Some suggestions for the reform of inflation targeting are made to reduce the need for unconventional policy instruments in the future. (C) 2017 Elsevier Inc. All rights reserved.
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The current financial crisis has revived the interest for monitoring both monetary and credit developments. Over the past two decades, consistent with the adoption of inflation targeting strategies by a growing number of central b...
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The current financial crisis has revived the interest for monitoring both monetary and credit developments. Over the past two decades, consistent with the adoption of inflation targeting strategies by a growing number of central banks and the development of New Keynesian models for which monetary aggregates are largely irrelevant, money and credit have been progressively neglected in the conduct of monetary policy. A striking exception has been the Eurosystem, which has implemented a strategy known as the "two-pillar monetary policy strategy" giving a prominent role for money. In this paper, we develop a small optimizing model based on Ireland (2004), estimated on euro area data and featuring this two-pillar strategy. We evaluate an F.CB-style cross-checking policy rule in a DSGE model with real balance effects of money. We find some evidence that indeed money plays a non-trivial role in explaining the euro area business cycle. This provides a rationale for the central bank to factor in monetary developments but also raises some issues regarding the reliability of M3 as an appropriate monetary indicator. We find some evidence that the ECB has systematically reacted to a filtered measure of money growth but weak evidence it has reacted more aggressively during excess money growth periods.
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It is most important for monetary policy to track the natural rate of interest when interest rates take large and sustained swings away from their long-run equilibrium values. Here, we study two models: a standard New Keynesian mo...
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It is most important for monetary policy to track the natural rate of interest when interest rates take large and sustained swings away from their long-run equilibrium values. Here, we study two models: a standard New Keynesian model and one in which government bonds provide liquidity. Policy rules that cannot track the natural rate perform poorly in both models, but are especially bad in the second because of sustained movements in the natural rate induced by fiscal shocks. First difference rules, on the other hand, do surprisingly well. When model uncertainty is taken into account, the dominance of the first difference rule is even more pronounced.
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We show how a positive correlation between the equilibrium real interest rate (ERR) and trend growth matters for two widely debated issues in monetary policy. First, a simple Taylor rule is more robust to uncertainty about the tre...
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We show how a positive correlation between the equilibrium real interest rate (ERR) and trend growth matters for two widely debated issues in monetary policy. First, a simple Taylor rule is more robust to uncertainty about the trend growth rate than suggested by some analyses of the increase in U.S. inflation during the 1970s, because the policy mistake made when measuring the change in trend growth gets offset by the accompanying mistake in measuring the change in the ERR. Second, ignoring this correlation when estimating policy rules results in coefficients that exaggerate both the degree of interest rate smoothing and the strength of the monetary authority's response to inflation.
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This paper is an empirical investigation on whether the Bank of Korea should respond to the housing price developments in conducting monetary policy. For that aim, we construct a small scale empirical model of the Korean economy, ...
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This paper is an empirical investigation on whether the Bank of Korea should respond to the housing price developments in conducting monetary policy. For that aim, we construct a small scale empirical model of the Korean economy, simulate the estimated model with a set of alternative monetary policy rules, and compare the stabilization performances of those rules. There turns out to be ample room for further stabilization of inflation and output, if the central bank shifts from the historically conducted monetary policy rule to the optimal rule. The stabilization gains under the optimal rule, however, are not attributable to additional policy indicators (such as housing price inflation) the optimal rule involves. Rather, the optimal rule improves upon the historical one because the former takes a quite different reaction scheme toward the historical policy indicators. Moreover, as long as the Bank of Korea maintains appropriate reactions to the historical policy indicators, housing price inflation does not contain much extra information for further stabilization.
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This paper examines the optimal design of monetary policy in the European monetary union in the presence of structural asymmetries across union member countries. It derives analytically an optimal interest rate rule under commitme...
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This paper examines the optimal design of monetary policy in the European monetary union in the presence of structural asymmetries across union member countries. It derives analytically an optimal interest rate rule under commitment and studies the depend
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Observers have relied increasingly on simple reaction functions, such as the Taylor rule, to assess the conduct of monetary policy. Applying this approach to deflationary or near-zero inflation environments is problematic, however...
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Observers have relied increasingly on simple reaction functions, such as the Taylor rule, to assess the conduct of monetary policy. Applying this approach to deflationary or near-zero inflation environments is problematic, however, and this paper examines two shortcomings of particular relevance to the Japanese case of the last decade. One is the unusually high degree of uncertainty associated with potential output in an environment of prolonged stagnation and deflation. Consequently, reaction function-based assessments of Japanese monetary policy are so sensitive to the chosen gauge of potential output as to be unreliable. The second shortcoming is the neglect of policy expectations, which become critically important as nominal interest rates approach zero. Using long-term bond yields, we identify five episodes since 1996 characterized by abrupt declines in Japanese inflation expectations. Policies undertaken by the Bank of Japan during this period did little to stabilize expectations, and the August 2000 interest-rate increase appears to have intensified deflationary concerns.
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We discuss the Taylor rule near low inflation and interest rates. Using an additional option-like term in the Federal Reserve's loss function (i.e., the "deflation put") we extend the classic Taylor rule to one with an asymmetric ...
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We discuss the Taylor rule near low inflation and interest rates. Using an additional option-like term in the Federal Reserve's loss function (i.e., the "deflation put") we extend the classic Taylor rule to one with an asymmetric response that is more accommodative when the inflation rate is very low. Once calibrated, this payoff profile gives an exact, and easily communicable prescription for Federal Reserve policy under regimes of low inflation. Simple models of central bank behavior can produce highly complex yield curve shapes. Using the usual Taylor rule and our proposed extension as building blocks, we construct a robust framework for generating realistic yield curves and the evolution of the economy. Our main focus is the impact on the yield curve and the economy of the "deflation put". We find that for economies like the U.S. the deflation put reduces yields for all maturities. We also find that in highly leveraged economies (such as Japan) the consequence of an asymmetric deflation fighting policy may result in improved economic conditions, but also raises the possibility of higher long-term yields as a consequence.
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