A conference on price stability
A discussion of six papers presented at the Federal Reserve Bank of Cleveland's Conference on Price Stability in November 1990, focusing on how recent developments in macroeconomic research have changed perceptions about optimal inflation policy.
Inflation and output in New Keynesian models with a transient interest rate peg
Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary ...
Inflation and the personal tax code: assessing indexation
A reexamination of the potential costs of anticipated inflation in view of the inflation indexing system established during the 1980s.
The economics of health care reform
An analysis of how three health care reform proposals--universal coverage, mandatory participation in regional health care alliances, and community-rated insurance premiums--would affect Americans' health and pocketbooks.
Monetary policy and self-fulfilling expectations: the danger of forecasts
What rule should a central bank interested in inflation stability follow? Because monetary policy tends to work with lags, it is tempting to use inflation forecasts to generate policy advice. This article, however, suggests that the use of forecasts to drive policy is potentially destabilizing. The problem with forecast-based policy is that the economy becomes vulnerable to what economists term ?sunspot? fluctuations. These welfare-reducing fluctuations can be avoided by using a policy that puts greater weight on past, realized inflation rates rather than forecasted, future rates.
The efficiency and welfare effects of tax reform: are fewer tax brackets better than more?
Using the well-known dynamic fiscal policy framework pioneered by Auerbach and Kotlikoff, we examine the efficiency and welfare implications of shifting from a linear marginal tax rate structure to a discrete rate structure characterized by two regions of flat tax rates of 15 and 28 percent. For a wide range of parameter values, we find that there is no sequence of lump-sum transfers that the (model) government can feasibly implement to make the shift from the linear to the discrete structure Pareto-improving. We conclude that the worldwide trend toward replacing rate structures having many ...
Gaps versus growth rates in the Taylor Rule
There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.
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 ...
Regional variations in white-black earnings
An examination of why black Americans' earnings continue to lag whites' and why the problem is especially acute in the southern states. Better understanding of the factors driving regional pay differentials can help explain some of the disparities at the national level and is also applicable to a wide variety of other public policy issues.
The fiscal theory of the price level
A traditional function of the central bank is to control the price level. The fiscal theory of the price level challenges this assumption, arguing instead that the fiscal authority's budgetary policy is the primary determinant of the price level. The authors provide a critical review of the fiscal theory and its implications for monetary policy.