Creator: Den Haan, Wouter J., 1962- Series: Nonlinear rational expectations modeling group Abstract:
The objective of this paper is to investigate whether, in a Sidrauski type model with uncertainty, welfare maximization calls for following the famous "Chicago Rule". This question will be answered in the affirmative in this paper, i.e. social welfare optimization calls for a zero nominal interest rate on one-period bonds. The zero nominal interest rate, however, does not imply in an uncertain world that there is no systematic difference between the expected rate of deflation and the rate of time preference in an economy without growth. The magnitude of this difference turns out to be small, however. Numerical welfare comparisons are made between the optimal policy and policies in which the growth rate of money is fixed. The optimal policy requires that the monetary authorities react every period to the available information and they choose a growth level of the money stock that will set the interest rate equal to zero. If we compare the time paths of the real variables under the optimal policy with the time paths if the money supply decreases at a rate equal to the rate of time preference, then we see hardly any differences. The price dynamics can be very different, however. The paper also investigates the issue of superneutrality and finds that the quantitative deviations from superneutrality are substantial if a model with a shopping time technology is used. The neo-classical models in this paper are solved numerically using a technique developed in Marcet (1988).
Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation and E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy
Creator: Coleman, Wilbur John. Series: Nonlinear rational expectations modeling group Abstract:
A cash-in-advance constraint on consumption is incorporated into a standard model of consumption and capital accumulation. Monetary policy consists of lump-sum cash transfers. Methods are developed for establishing the existence and uniqueness of an equilibrium. and for explicitly constructing this equilibrium. The model economy's dependence on monetary policy is explored.
Also published in the International Finance Discussion Paper series, number 323.
Keyword: Equilibrium, Planned Growth economy, and Monetary Growth economy Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, O41 - One, Two, and Multisector Growth Models, O42 - Economic growth and aggregate productivity - Monetary growth models, and E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy
Creator: Williamson, Stephen D. Series: Lucas expectations anniversary conference Abstract:
A cash-in-advance model with sequential markets is constructed, where unanticipated monetary injections are nonneutral and can potentially produce large liquidity effects. However, if the monetary authority adheres to an optimal money rule, money should not respond to unanticipated shocks, so that a Friedman rule is suboptimal and the monetary authority does not exploit the liquidity effect. Quantitatively, the model can generate variability in money and nominal interest rates close to what is observed, and can produce data with no obvious evidence of the existence of liquidity effects.
Keyword: Monetary policy, Interest, Liquidity, Money, and Interest rates Subject (JEL): E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy and E50 - Monetary policy, central banking, and the supply of money and credit - General
Creator: Lacker, Jeffrey Malcolm. Series: Foundations of policy toward electronic money Abstract:
Briefly reviews the potential consequences of electronic money for the management of the government's balance sheet through open market operations and for the regulations governing the public and private issue of payment instruments.
Keyword: Monetary policy, Electronic money, and Payment instruments Subject (JEL): E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems
Creator: Erceg, Christopher J. and Levin, Andrew T. (Andrew Theo) Series: Joint commitee on business and financial analysis Abstract:
The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. We derive the social welfare function and show that the optimal monetary policy rule responds to sector-specific inflation rates and output gaps. We show that some commonlyprescribed policy rules perform poorly in terms of social welfare, especially rules that put a higher weight on inflation stabilization than on output gap stabilization. By contrast, it is interesting that certain rules that react only to aggregate variables, including aggregate output gap targeting and rules that respond to a weighted average of price and wage inflation, may yield a welfare level close to the optimum given a typical distribution of shocks.
Keyword: Monetary policy, Consumer, Business cycles, Durable goods, and Social welfare Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Croushore, Dean Darrell, 1956- and Evans, Charles, 1958- Series: Joint committee on business and financial analysis Abstract:
Monetary policy research using time series methods has been criticized for using more information than the Federal Reserve had available in setting policy. To quantify the role of this criticism, we propose a method to estimate a VAR with real-time data while accounting for the latent nature of many economic variables, such as output. Our estimated monetary policy shocks are closely correlated with a typically estimated measure. The impulse response functions are broadly similar across the methods. Our evidence suggests that the use of revised data in VAR analyses of monetary policy shocks may not be a serious limitation.
Keyword: Monetary policy, Identification, VARs, Data revisions, Real-time data, and Shocks Subject (JEL): C82 - Data collection and data estimation methodology ; Computer programs - Methodology for collecting, estimating, and organizing macroeconomic data, C32 - Multiple or simultaneous equation models - Time-series models ; Dynamic quantile regressions, and E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy