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Journal Article
Fiscal and monetary policy: conference summary
This Economic Letter summarizes the papers presented at a conference on "Fiscal and Monetary Policy" held at the Federal Reserve Bank of San Francisco on March 4 and 5, 2005.
Working Paper
Exploring the Role of the Real Exchange Rate in Australian Monetary Policy
An important issue in small open-economies is whether policymakers should respond to exchange rate movements when they formulate monetary policy. Micro-founded models tend to suggest that there is little to be gained from responding to exchange rate movements, and the literature has largely concluded that such a response is unnecessary, or even undesirable (Taylor, 2001). This paper examines this issue using an estimated model of the Australian economy. In contrast to micro-founded models, according to this model policymakers should allow for movements in the real exchange rage and the ...
Working Paper
New Keynesian Optimal Policy Models: An Empirical Assessment
This paper estimates two optimization-based sticky-price New Keynesian models and assesses how well they describe U.S. output, inflation, and interest rate dynamics. We consider models in which either internal habit formation influence consumption behavior, and in which Calvo-pricing and inflation indexation generate price and inflation inertia. Subject to constraints dictated by household and firm behavior, monetary policy is set under discretion and the model’s time-consistent equilibrium is employed to estimate key behavioral parameters. We find that specifications estimated on ...
Journal Article
Policy applications of a global macroeconomic model
In this Economic Letter, we summarize the key components of the GVAR model and discuss its usefulness for monetary policy applications and for credit risk management issues faced by financial institutions and their government supervisors. We argue that while the GVAR model is probably useful for credit risk management and could potentially have some use for bank supervision, it is unlikely to be as useful for monetary policy applications.
Working Paper
Optimal Policy Rules in Rational-Expectations Models: New Solution Algorithms
This paper develops methods to solve for optimal discretionary policies and optimal commitment policies in rational expectations models. These algorithms, which allow the optimization constraints to be conveniently expressed in second-order structural form, are more general than existing methods and are simple to apply. We use several New Keynesian business cycle models to illustrate their application. Simulations show that the procedures developed in this paper can quickly solve small-scale models and that they can be usefully and effectively applied to medium- and large-scale models.
Journal Article
Fixing the New Keynesian Phillips curve
This Economic Letter looks at the problems with the NKPC and discusses some alternatives that are increasingly being used to think about inflation and the monetary policy transmission mechanism.
Working Paper
Optimal Simple Targeting Rules for Small Open Economies
This paper solves for optimal policy rules in a stylized small open economy model under a spectrum of targeting regimes. These policy reaction functions are presented as feedback rules highlighting the dominant state variables in each rule. Optimal simple rules – rules that exploit a reduced information set – are explored to assess how much is lost when information is excluded from the optimal state-contingent rule. For the model analyzed we find that some optimal simple rules can approximate reasonably well the optimal state-contingent rule, these simple rules contain the real exchange ...
Journal Article
Monetary policy and asset markets: conference summary
This Economic Letter summarizes the papers presented at a conference on "Monetary Policy and Asset Markets" held at the Federal Reserve Bank of San Francisco on February 22, 2008. ; One of the papers focused on extracting information on policy changes from the interest rate term structure and on whether investors value those policy changes or view them as an additional source of risk to be hedged. Another paper examined the extent to which subjective expectations may explain certain asset price puzzles. A third paper looked at the housing sector, quantifying the factors that drive residential ...
Working Paper
The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information
This paper considers the optimal degree of monetary-discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant ?constrained discretion? to the central bank by imposing both upper and lower bounds on permissible inflation, and that ...
Working Paper
Model uncertainty and monetary policy
Model uncertainty has the potential to change importantly how monetary policy should be conducted, making it an issue that central banks cannot ignore. In this paper, I use a standard new Keynesian business cycle model to analyze the behavior of a central bank that conducts policy with discretion while fearing that its model is misspecified. I begin by showing how to solve linear-quadratic robust Markov-perfect Stackelberg problems where the leader fears that private agents form expectations using the misspecified model. Next, I exploit the connection between robust control and uncertainty ...