Search Results
Conference Paper
Indicator variables for optimal policy
The optimal weights on indicators in models with partial information about the state of the economy and forward-looking variables are derived and interpreted, both for equilibria under discretion and under commitment. An example of optimal monetary policy with a partially observable potential output and a forward-looking indicator is examined. The optimal response to the optimal estimate of potential output displays certainty-equivalence, whereas the optimal response to the imperfect observation of output depends on the noise in this observation.
Working Paper
Current account dynamics and monetary policy
We explore the implications of current account adjustment for monetary policy within a simple two country SGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second ...
Working Paper
The equilibrium degree of transparency and control in monetary policy
We examine a central bank's endogenous choice of degree of control and degree of transparency, under both commitment and discretion. Under commitment, we find that the deliberate choice of sloppy control is far less likely under a standard central-bank loss function than reported for a less-standard loss function by Cukierman and Meltzer. Under discretion, the maximum degree of control is the only equilibrium. With regard to the degree of transparency, under commitment, a sufficiently patient bank with sufficiently low average inflation bias will always choose minimum transparency. Under ...
Conference Paper
Monetary policy and real stabilization
Journal Article
Monetary policy and learning
A new strand of macroeconomic literature examines the relationship between learning and monetary policy-how monetary policymakers learn about the economy as they try to achieve their goals, how the public learns about policymakers' objectives, and how the public's learning, in turn, changes the way monetary policy works. An Atlanta Fed conference in March 2003 brought together some of the main contributors to this emerging literature. ; In the conference keynote address, reprinted here, Lars Svensson focused on what constitutes good monetary policy and how it is related to central-bank ...
Working Paper
Transparency and credibility: monetary policy with unobservable goals
We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and are inferred from the policy outcome. A low-credibility bank optimally conducts a more inflationary policy than a high-credibility bank, in the sense that it induces higher inflation, but a less expansionary policy in the sense that it induces lower inflation and employment than expected. Increased transparency makes the bank's reputation and credibility more sensitive to its actions. This has a moderating influence on the bank's policy. ...
Conference Paper
Monetary policy issues for the Eurosystem
Working Paper
Optimal policy projections
We outline a method to provide advice on optimal monetary policy while taking policymakers' judgment into account. The method constructs optimal policy projections (OPPs) by extracting the judgment terms that allow a model, such as the Federal Reserve Board staff economic model, FRB/US, to reproduce a forecast, such as the Greenbook forecast. Given an intertemporal loss function that represents monetary policy objectives, OPPs are the projections---of target variables, instruments, and other variables of interest---that minimize that loss function for given judgment terms. The method is ...
Journal Article
Targeting versus instrument rules for monetary policy: what is wrong with McCallum and Nelson?
In their paper "Targeting versus Instrument Rules for Monetary Policy," McCallum and Nelson critique targeting rules for the analysis of monetary policy. Their arguments are rebutted here. First, McCallum and Nelson's preference to study the robustness of simple monetary policy rules is no reason at all to limit attention to simple instrument rules; simple targeting rules may have more desirable properties. Second, optimal targeting rules are a compact, robust, and structural description of goal-directed monetary policy, analogous to the compact, robust, and structural consumption Euler ...