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Creator: Christiano, Lawrence J. and Eichenbaum, Martin S. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 150 Abstract:
Several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment. Existing quantitative general equilibrium models, which allow for capital accumulation, are inconsistent with this view. There does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates, output, and employment to a money supply shock. However, a key shortcoming of these models is that they cannot rationalize persistent liquidity effects. This paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence. We argue that once a simplified version of the model in Christiano and Eichenbaum (1991) is modified to allow for extremely small costs of adjusting sectoral flow of funds, positive money shocks generate long-lasting, quantitatively significant liquidity effects, as well as persistent increases in aggregate economic activity.
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 481 Abstract:
This paper investigates the effects of changes in a country's monetary policies on its economy and the welfare of its citizens and those of other countries. Each country is populated by two-period lived overlapping agents who reside in either a home service sector or a world-traded good sector. Policy effects are transmitted through changes in the real interest rate, relative prices, and price levels. Welfare effects are sometimes dominated by relative price movements and can thus be opposite of those found in one-good models. Simulation of dynamic paths also reveals that welfare effects for some types of agents reverse between those born in immediate post-shock periods and those born later.
Palavra-chave: Exchange rates, Real interest rates, Monetary policy, Prices, and Relative prices Sujeito: E31 - Price Level; Inflation; Deflation, F31 - Foreign Exchange, and E52 - Monetary Policy
Creator: Lagos, Ricardo and Zhang, Shengxing Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 734 Abstract:
We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
Palavra-chave: Asset prices, Monetary policy, Monetary transmission, and Liquidity Sujeito: E52 - Monetary Policy, D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Christiano, Lawrence J., Eichenbaum, Martin S., and Evans, Charles, 1958- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 227 Abstract:
We provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. After a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline by a modest amount, and profits fall. We compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts. The key failing of the sticky price model lies in its counterfactual implications for profits. The limited participation model can account for all the above facts, but only if one is willing to assume a high labor supply elasticity (2 percent) and a high markup (40 percent). The shortcomings of both models reflect the absence of labor market frictions, such as wage contracts or factor hoarding, which dampen movements in the marginal cost of production after a monetary policy shock.
Palavra-chave: Mechanism, Prices, Credit, and Monetary transmission Sujeito: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 330 Abstract:
The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsistency problem.
Sujeito: E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E58 - Central Banks and Their Policies, F42 - International Policy Coordination and Transmission, F33 - International Monetary Arrangements and Institutions, and F41 - Open Economy Macroeconomics
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 308 Abstract:
We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free-rider problem in the setting of nonmonetary policies, such as labor market policy, fiscal policy, and bank regulation. The free-rider problem leads the union’s members to pursue lax nonmonetary policies that induce the monetary authority to generate high inflation. The free-rider problem can be mitigated by imposing constraints on the nonmonetary policies, like unionwide rules on labor market policy, debt constraints on members’ fiscal policy, and unionwide regulation of banks. When there is no time inconsistency problem, there is no free-rider problem, and constraints on nonmonetary policies are unnecessary and possibly harmful.
Palavra-chave: Fixed exchange rates, European Union, Maastricht Treaty, Monetary regime, and Dollarization Sujeito: F30 - International Finance: General, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E58 - Central Banks and Their Policies, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, F41 - Open Economy Macroeconomics, F33 - International Monetary Arrangements and Institutions, F42 - International Policy Coordination and Transmission, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Miller, Preston J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 266 Abstract:
Trade protection remains a prominent feature of the current world economy and likely has significant effects on industries and macroeconomies. In this paper a particular type of policy, price supports, is analyzed in a two-country, dynamic, general equilibrium model. This model brings new perspectives to the analysis in that it is monetary and has labor mobility within countries between the traded-goods and non–traded-goods sectors. It is found that: (1) The introduction of price supports in an economy benefits only the agents currently working in the traded-goods sector. (2) Cooperation among countries in setting policies results in a higher level of price supports than does noncooperation. (3) Price-support policies can importantly affect the transmission of monetary policy effects, introducing permanent changes in real variables where there were none before and even reversing the signs of changes in some variables.
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 317 Abstract:
This paper examines the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero. In the first part we provide sufficient conditions for these policies to converge. In the second part we provide examples where these policies diverge. Briefly, we show that if there are unremovable domestic distortions then there can be gains to coordination between countries even when countries have no ability to affect world prices. These results are at variance with the received wisdom in the optimal tariff literature. The key distinction is that we model explicitly the spending decisions of the government while the optimal tariff literature does not.
Palavra-chave: Fiscal policy and International economic relations Sujeito: N10 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: General, International, or Comparative and F42 - International Policy Coordination and Transmission
Creator: Kehoe, Patrick J. and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 543 Abstract:
Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies
Palavra-chave: Optimal currency area, International financial markets, Cross-country insurance, International transfers, Cross-country externalities, Cross-country transfers, and Fiscal externalities Sujeito: F35 - Foreign Aid, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G15 - International Financial Markets, G33 - Bankruptcy; Liquidation, F42 - International Policy Coordination and Transmission, G28 - Financial Institutions and Services: Government Policy and Regulation, F33 - International Monetary Arrangements and Institutions, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and F38 - International Financial Policy: Financial Transactions Tax; Capital Controls