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Author:Dotsey, Michael 

Working Paper
Behavior of the real rate of interest over the business cycle

In this paper we document real rate behavior. We do this by looking across a wide variety of constructed real rate series. These series are obtained by using a number of different methodologies for estimating expected inflation, using several different price series, and looking over different time periods. The evidence suggests that over the entire sample period, real rate increases follow output increases and the real rate is positively correlated with contemporaneous output. These results, however, are sensitive to the price series used. That is, we find evidence of specification ...
Working Paper , Paper 00-09

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 ...
Working Papers , Paper 07-27

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 Papers , Paper 2210

Journal Article
How the Fed affects the economy: a look at systematic monetary policy

Until recently, when assessing the economic effects of monetary policy, economists have emphasized the role of unanticipated changes in policy. But are these policy shocks likely to be the most important influence on the economy? Mike Dotsey believes not. It seems more likely that the Fed's systematic behavior plays a bigger part in what happens in the U.S. economy. In "How the Fed Affects the Economy: A Look at Systematic Monetary Policy," Dotsey explains the ways in which systematic policy influences economic activity
Business Review , Issue Q1 , Pages 6-15

Working Paper
Inflation uncertainty and growth in a simple monetary model

This paper analyzes the effects of inflation variability on economic growth in a model where money is introduced via a cash-in-advance constraint. In this setting, we find that inflation adversely affects long-run growth, even when the cash-in-advance constraint applies only to consumption. At the same time, we find that inflation and growth are positively related in the short-run. In addition, variability tends to increase average growth through a precautionary savings motive. Since inflation and inflation variability tend to be highly correlated, this latter effect attenuates the negative ...
Working Paper , Paper 97-05

Journal Article
Controversy over the federal budget deficit : a theoretical perspective

Recently, the Office of Management and Budget projected that the fiscal 1985 federal budget deficit would exceed $200 billion and that out-year reductions would be gradual at best. These prospects have engendered a debate concerning the economic effects of government deficits and the attendant high level of government borrowing. In this article, Michael Dotsey investigates this topic theoretically using alternative macroeconomic models. Dotsey first examines a standard Keynesian model and finds that its prediction of a depressing future effect of government borrowing stems from its ...
Economic Review , Volume 71 , Issue Sep , Pages 3-16

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.
Economic Review , Volume 77 , Issue Sep , Pages 13-19

Journal Article
Oil shocks, monetary policy, and economic activity

Various reasons have been given to explain downturns in U.S. economic activity since World War II. Romer and Romer (1989) argued that these recessions were primarily associated with monetary contractions, while Hamilton (1983) and others attributed them to oil price increases. We investigate these competing hypotheses and find that when measures of oil prices are included, the Romers measure of monetary policy does not significantly explain economic downturns. However, alternative measures of monetary policy, specifically the federal funds rate the spread between the ten-year Treasury rate ...
Economic Review , Volume 78 , Issue Jul , Pages 14-27

Working Paper
The effects of fiscal policy in a neoclassical growth model

This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government is constrained from using lump sum taxes for achieving intertemporal budget balance. The ratio of debt to gnp, therefore, has consequences for the future choices of government spending and distortionary taxation and hence affects real economic activity. Further modeling fiscal policy in this way generates results that differ substantially from those in standard stochastic models where lump sum taxes are used for budget balance. The modeling ...
Working Paper , Paper 94-03

Journal Article
Structure from shocks

Economic Quarterly , Issue Fall , Pages 37-47

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