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Working Paper
Switching Volatility in a Nonlinear Open Economy
Uncertainty about an economy’s regime can change drastically around a crisis. An imported crisis such as the global financial crisis in the euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the euro area and the United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with periods of calm. We describe how U.S. shocks from both the real economy and financial markets affected the euro area economy and how bond ...
Working Paper
Time-Varying Money Demand and Real Balance Effects
This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that households? money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the households? preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest-elasticity of money demand of approximately one-third during the 1970s due to high ...
Working Paper
Forecast Performance in Times of Terrorism
Governments, central banks and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, a factor that should be considered by decision-makers. We focus on terrorism as a mostly endogenously driven form of political uncertainty and assess the forecasting performance of market-based and professional inflation and exchange rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, the performance of both ...
Working Paper
Optimal Monetary Policy Under Bounded Rationality
Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. Stabilizing properties and bounded rationality-independence generally affect the regime's optimality. The policymaker's knowledge of an agent's myopia is decisive, whereas bounded rationality is not necessarily associated with decreased welfare. Several forms of ...
Working Paper
Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation
Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank?s objectives? Is minimizing a central bank loss equivalent to maximizing households? welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate ...