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Working Paper
Interest rate versus money supply instruments: on the implementation of Markov-perfect optimal monetary policy
Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. With respect to time consistent policy, the literature focuses on solving for allocations. Recently, however, King and Wolman (2004) have examined implementation issues involved under time consistent policy when the monetary authority chooses nominal money balances. Surprisingly, they find that equilibria are no longer unique under a money stock regime. Indeed, there exist multiple steady states. Dotsey and Hornstein find that King and ...
Journal Article
DSGE models and their use in monetary policy
The past 10 years or so have seen the development of a new class of models that are proving useful for monetary policy: dynamic stochastic general equilibrium (DSGE) models. Many central banks around the world, including the Swedish central bank, the European Central Bank, the Norwegian central bank, and the Federal Reserve, use these models in formulating monetary policy. In this article, Mike Dotsey discusses the major features of DSGE models and why these models are useful to monetary policymakers. He outlines the general way in which they are used in conjunction with other tools commonly ...
Journal Article
Monetary policy and operating procedures in New Zealand
The Reserve Bank of New Zealand operates in a highly deregulated financial environment which lacks any interest rate regulation or reserve requirements. Yet the Reserve Bank has been able to implement effective monetary policy through a quantity-based procedure. This article analyzes the operating procedures of the Reserve Bank of New Zealand and the relatively small financial costs imposed by these procedures.
Working Paper
The effects of cash management practices on the demand for demand deposits
During the mid-1970s standard regressions explaining the demand for money underwent a well documented shift. This shift was largely attributed to the adoption of a more sophisticated methods of cash management practices by firms. ; A version of this work was published in the Federal Reserve Bank of Richmond's Economic Review, 1984, Vol. 70, No. 5
Working Paper
Demographic Aging, Industrial Policy, and Chinese Economic Growth
We examine the role of demographics and changing industrial policies in ac- counting for the rapid rise in household savings and in per capita output growth in China since the mid-1970s. The demographic changes come from reductions in the fertility rate and increases in the life expectancy, while the industrial policies take many forms. These policies cause important structural changes; first benefiting private labor-intensive firms by incentivizing them to increase their share of employment, and later on benefiting capital-intensive firms resulting in an increasing share of capital devoted ...
Working Paper
Nontraded goods, market segmentation, and exchange rates.
Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods have important implications for exchange rate behavior, even though fluctuations in the relative price of nontraded goods account for a relatively small fraction of real exchange rate movements. In our quantitative study ...
Working Paper
Demographic Transition, Industrial Policies, and Chinese Economic Growth
We build a unified framework to quantitatively examine the demographic transition and industrial policies in contributing to China’s economic growth between 1976 and 2015. We find that the demographic transition and industrial policy changes by themselves account for a large fraction of the rise in household and corporate savings relative to total output and the rise in the country’s per capita output growth. Importantly, their interactions also lead to a sizable fraction of the increases in savings since the late 1980s and reduce growth after 2010. A novel and important factor that ...
Working Paper
On the implementation of Markov-perfect interest rate and money supply rules: global and local uniqueness
Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. This literature usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study how the policy can be implemented given the available policy instruments. Recently, however, King and Wolman (2004) have shown that a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money ...
Working Paper
Interest rate rules and nominal determinacy
Monetary economists have recently begun a serious study of money supply rules that allow the Fed to adjustably peg the nominal interest rate under rational expectations. These rules vary from procedures that produce stationary nominal magnitudes to those that generate nonstationarities in nominal variables. Our paper investigates the determinacy properties of three representative interest rate rules. ; We use Blanchard and Kahn's solution technique as a starting point. It doesn't directly apply, so we first modify their procedure. We then narrow the range of solutions by considering the ARMA ...
Journal Article
Designing monetary policy rules in an uncertain economic environment
A well-designed monetary policy can help the economy respond efficiently to economic disturbances by limiting the deviation of economic activity from its potential while keeping inflation close to its desired rate. But successful implementation of such strategies must confront significant challenges arising from various forms of economic uncertainty. In this article, Michael Dotsey and Charles Plosser discuss the design of monetary policy rules in an environment in which policymakers face two distinct forms of uncertainty: the uncertainty surrounding the precise values of key policy variables ...