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Creator: Alvarez, Fernando, 1964-, Atkeson, Andrew, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 278 Abstract:
This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money only infrequently. When the government injects money through an open market operation, only those agents that are currently trading absorb these injections. Through their impact on these agents’ consumption, these money injections affect real interest rates and real exchange rates. We show that the model generates the observed negative relation between expected inflation and real interest rates. With moderate amounts of segmentation, the model also generates other observed features of the data: persistent liquidity effects in interest rates and volatile and persistent exchange rates. A standard model with no fixed costs can produce none of these features.
Mot-clé: Fixed costs, Liquidity effects, Volatile real exchange rates, Baumol-Tobin model, and Term structure of interest rates Assujettir: F31 - Foreign Exchange, E52 - Monetary Policy, F41 - Open Economy Macroeconomics, E43 - Interest Rates: Determination, Term Structure, and Effects, and E40 - Money and Interest Rates: General
Creator: Atkeson, Andrew, Chari, V. V., and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 394 Abstract:
The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies.
Assujettir: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E52 - Monetary Policy, E51 - Money Supply; Credit; Money Multipliers, E40 - Money and Interest Rates: General, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), E58 - Central Banks and Their Policies, E31 - Price Level; Inflation; Deflation, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 399 Abstract:
Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing “Modern Macroeconomics in Practice.” Solow eloquently voices the commonly heard complaint that too much macroeconomic work today starts with a model with a single type of agent. We argue that modern macroeconomics may not end too far from where Solow prefers. He is also critical of how modern macroeconomists use data to construct models. Specifically, he seems to think that calibration is the only way that our models encounter data. To the contrary, we argue that modern macroeconomics uses a wide variety of empirical methods and that this big-tent approach has served macroeconomics well. Solow also questions our claim that modern macroeconomics is firmly grounded in economic theory. We disagree and explain why.
Assujettir: E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E52 - Monetary Policy, E13 - General Aggregative Models: Neoclassical, E40 - Money and Interest Rates: General, E22 - Investment; Capital; Intangible Capital; Capacity, E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Creator: Correia, Isabel, Nicolini, Juan Pablo, and Teles, Pedro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 403 Abstract:
In this article, we analyze the implications of price-setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider standard monetary economies that differ in the price-setting restrictions imposed on the firms. We show that, independently of the degree or type of price stickiness, it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness. In this sense, environments with different price-setting restrictions are equivalent.
Mot-clé: Optimal fiscal and monetary policy and Sticky prices Assujettir: E62 - Fiscal Policy, E52 - Monetary Policy, E40 - Money and Interest Rates: General, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E58 - Central Banks and Their Policies, and E31 - Price Level; Inflation; Deflation
Creator: Correia, Isabel, Farhi, Emmanuel, Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 698 Abstract:
When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.
Mot-clé: Fiscal policy, Zero bound, Sticky prices, and Monetary policy Assujettir: E62 - Fiscal Policy, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E58 - Central Banks and Their Policies, E31 - Price Level; Inflation; Deflation, E40 - Money and Interest Rates: General, and E52 - Monetary Policy