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Working Paper
Inflation, personal taxes, and real output: a dynamic analysis
An examination, using the overlapping-generations approach, of how the interactions between inflation and the nominal taxation of capital income affect the cyclical behavior of the U.S. economy.
Working Paper
Privately optimal contracts and suboptimal outcomes in a model of agency costs
This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner?s ...
Working Paper
Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration
This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen?s inequality type argument: the deterministic multiplier is convex in ...
Journal Article
A conference on liquidity, monetary policy, and financial intermediation
A summary of the fifth in a series of symposiums sponsored by the Federal Reserve Bank of Cleveland. The September 1994 meeting was dedicated to monetary policy issues and included examinations of the macroeconomic effects of price rigidity and sluggish savings decisions by households, the interaction of inflation and financial intermediation, and the "deep structural" estimation of parameters in models with money and financial intermediation.
Journal Article
Explaining apparent changes in the Phillips curve: the Great Moderation and monetary policy
Observations that the Phillips curve may be deviating from historical norms are important to policymakers because deviations would imply that more or less output has to be sacrificed to achieve a permanent reduction in long-term inflation. But we argue that recent economic shocks and a shift in the Fed?s response to inflation may be leading economists to misestimate the curve.
Working Paper
Zero inflation: transition costs and shoe-leather benefits
A comparison showing that the transition costs of indexing inflation (a major obstacle to monetary policy reform) are approximately equal to the minor shoe-leather benefits of having price stability.
Journal Article
Inertial Taylor rules: the benefit of signaling future policy
This article traces the consequences of an energy shock on the economy under two different monetary policy rules: (i) a standard Taylor rule, where the Fed responds to inflation and the output gap, and (ii) a Taylor rule with inertia, where the Fed moves slowly to the rate predicted by the standard rule. The authors show that, with both sticky wages and sticky prices, the outcome of an inertial Taylor rule is superior to that of the standard rule, in the sense that inflation is lower and output is higher following an adverse energy shock. However, if prices alone are sticky, the results are ...
Journal Article
Considerable period of time: the case of signaling future policy
There has been a remarkable increase in the FOMC?s communication over the last decade. Perhaps the most dramatic change was the inclusion of language indicating the possible direction of future policy. One example is the now famous ?considerable-period? language that was inserted in August 2003. This forward-looking language was remarkable in that it seemingly signaled the Committee?s intention to keep rates low for an extended period. This Commentary analyzes the reasons behind the ?considerable-period-of-time? language, and it argues that such language was important to stem further declines ...
Working Paper
Taylor rules in a model that satisfies the natural rate hypothesis
The authors analyze the restrictions necessary to ensure that the interest-rate policy rule used by the central bank does not introduce real indeterminacy into the economy. They conduct this analysis in a flexible price economy and a sticky price model that satisfies the natural rate hypothesis. A necessary and sufficient condition for real determinacy in the sticky price model is that there must be nominal and real determinacy in the corresponding flexible price model. This arises if and only if the Taylor rule responds aggressively to lagged inflation rates.
Working Paper
Co-movement in sticky price models with durable goods
In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by ...