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Jel Classification:C62 

Working Paper
When does the cost channel pose a challenge to inflation targeting central banks?

In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in ...
Research Working Paper , Paper RWP 15-6

Working Paper
Equilibrium with Mutual Organizations in Adverse Selection Economies

An equilibrium concept in the Debreu (1954) theory-of-value tradition is developed for a class of adverse selection economies and applied to the Spence signaling and Rothschild-Stiglitz (1976) adverse selection environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
Working Papers , Paper 717

Working Paper
Global Dynamics in a Search and Matching Model of the Labor Market

We study global and local dynamics of a simple search and matching model of the labor market. We show that the model can be locally indeterminate or have no equilibrium at all, but only for parameterizations that are empirically implausible. In contrast to the local results, we show that the model exhibits chaotic and periodic dynamics for reasonable parameter values both in backward and forward time. In contrast to earlier work, we establish these results analytically without placing numerical restrictions on the parameters.
Working Paper , Paper 17-12

Working Paper
A Generalized Approach to Indeterminacy in Linear Rational Expectations Models

We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original state space with a set of auxiliary exogenous equations to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region ...
Finance and Economics Discussion Series , Paper 2019-033

Working Paper
Indeterminacy and forecastability

Recent studies document the deteriorating performance of forecasting models during the Great Moderation. This conversely implies that forecastability is higher in the preceding era, when the economy was unexpectedly volatile. We offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models. First, we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a prototypical New Keynesian model, we numerically demonstrate that indeterminacy due to passive ...
Globalization Institute Working Papers , Paper 91

Working Paper
Finite-Order VAR Representation of Linear Rational Expectations Models: With Some Lessons for Monetary Policy

This paper considers the characterization via finite-order VARs of the solution of a large class of linear rational expectations (LRE) models. I propose a unified approach that uses a companion Sylvester equation to check the existence and uniqueness of a solution to the canonical (first-order) LRE model in finite-order VAR form and a quadratic matrix equation to characterize it decoupling the backward- and forward-looking aspects of the model. I also investigate the fundamentalness of the shocks recovered. Solving LRE models by this procedure is straightforward to implement, general in its ...
Globalization Institute Working Papers , Paper 285

Report
Optimal target criteria for stabilization policy

This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is 1) consistent with the model?s structural equations, 2) strong enough to imply a unique equilibrium, and 3) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths ...
Staff Reports , Paper 535

Working Paper
Monetary Policy and Macroeconomic Stability Revisited

A large literature with canonical New Keynesian models has established that the Fed's policy change from a passive to an active response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a staggered price model with trend inflation using a Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. {{p}} The model empirically outperforms a canonical New Keynesian model and demonstrates an active response to inflation even in the Great Inflation era, during which the U.S. ...
Research Working Paper , Paper RWP 17-1

Working Paper
Monetary Policy and Macroeconomic Stability Revisited

A large literature has established that the Fed? change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature?s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature?s view. Our estimated model shows an active policy response to inflation even during the Great ...
Working Papers , Paper 19-14

Working Paper
Solving asset pricing models with stochastic volatility

This paper provides a closed-form solution for the price-dividend ratio in a standard asset pricing model with stochastic volatility. The solution is useful in allowing comparisons among numerical methods used to approximate the non-trivial closed-form.
Finance and Economics Discussion Series , Paper 2014-71

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