creator: Ireland, Peter N.
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Expectations, Credibility, and Time-Consistent Monetary Policy
description- – This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.
- – 1999-07-09
- – application/pdf
Implementing the Friedman Rule
description- – In cash-in-advance models, necessary and sufficient conditions for the existence of an equilibrium with zero nominal interest rates and Pareto optimal allocations place restrictions only on the very long-run, or asymptotic, behavior of the money supply. When these asymptotic conditions are satisfied, they leave the central bank with a great deal of flexibility to manage the money supply over any finite horizon. But what happens when these asymptotic conditions fail to hold? This paper shows that the central bank can still implement the Friedman rule if its actions are appropriately constrained in the short run.
- – WP460
- – 2000-06-01
- – application/pdf
Money's Role in the Monetary Business Cycle
description- – A small, structural model of the monetary business cycle implies that real money balances enter into a correctly-specified, forward-looking IS curve if and only if they enter into a correctly-specified, forward-looking Phillips curve. The model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation. Maximum likelihood estimates of the model's parameters take both of these considerations into account, but still suggest that money plays a minimal role in the monetary business cycle.
- – WP458
- – 2000-04-10
- – application/pdf
Endogenous Money or Sticky Prices?
description- – What explains the correlations between nominal and real variables in the postwar US data? Are these correlations indicative of significant nominal price rigidity? Or do they simply reflect the particular way that monetary policymakers react to developments in the real economy? To answer these questions, this paper uses maximum likelihood to estimate a model of endogenous money. This model allows, but does not require, nominal prices to be sticky. The results show that nominal price rigidity, over and above endogenous money, plays an important role in accounting for key features of the data.
- – WP499
- – 2001-06-18
- – application/pdf
The Real Balance Effect
description- – This paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin. When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero. Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive.
- – WP491
- – 2001-02-01
- – application/pdf
"Rules Rather Than Discretion"After Twenty Five Years: What Have We Learned? What More Can We Learn?
description- – Kydland and Prescott first identified the inflationary bias that results when a central bank does not precommit to a monetary policy rule. Subsequent work, published over the past twenty five years, demonstrates that this inflationary bias can be minimized by appointing central bankers whose preferences or incentives differ systematically from those of society as a whole. Subsequent work also shows that central bankers may optimally choose to maintain their reputations as inflation fighters. The literature to date, however, says remarkably little about how central bankers establish their reputations, or build credibility for their policies, in the first place.
- – WP530
- – 2002-04-15
- – application/pdf
The Own-Price of Money and a New Channel of Monetary Transmission
description- – Traditionally, the effects of monetary policy actions on output are thought to be transmitted via monetary or credit channels. Real business cycle theory, by contrast, highlights the role of real price changes as a source of revisions in spending and production decisions. Motivated by the desire to focus on the effects of price changes in the monetary transmission mechanism, this paper incorporates a direct measure of the real own-price of money into an estimated vector autoregression and a calibrated real business cycle model. Consistent with this new view of the monetary transmission mechanism, both approaches reveal that movements in the own-price of money are strongly related to movements in output.
- – WP544
- – 2002-10-26
- – application/pdf
Technology Shocks in the New Keynesian Model
description- – In a New Keynesian model, technology and cost-push shocks compete as terms that stochastically shift the Phillips curve. A version of this model, estimated via maximum likelihood, points to the cost-push shock as far more important than the technology shock in explaining the behavior of output, inflation, and interest rates in the postwar United States data. These results weaken the links between the current generation of New Keynesian models and the real business cycle models from which they were originally derived; they also suggest that Federal Reserve ocials have often faced dicult trade-offs in conducting monetary policy.
- – WP536
- – 2002-08-13
- – application/pdf
Heterogeneity and Redistribution: By Monetary or Fiscal Means?
description- – In models with heterogeneous agents, issues of distribution and redistribution jump to the fore, raising the question: which policies--monetary or fiscal--work most effectively in transferring income from one group to another? To begin answering this question, this note works through a series of examples using Townsend's turnpike model. Two basic results emerge. First, the zero lower bound on nominal interest rates often appears as an obstacle to redistribution by monetary means. Second, assumptions made about the government's ability to raise tax revenue without distortion and to discriminate between agent types in distributing that tax revenue play a large role in determining whether agents prefer to redistribute income by monetary or fiscal means.
- – 2004-05-01
- – application/pdf
Changes in the Federal Reserve's Inflation Target: Causes and Consequences
description- – This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve's unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.
- – WP607
- – 2005-01-01
- – application/pdf
The Monetary Transmission Mechanism
description- – The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
- – WP628
- – 2005-10-19
- – application/pdf
Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model
description- – A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon.
- – WP642
- – 2006-04-01
- – application/pdf
On the Welfare Cost of Inflation and the Recent Behavior of Money Demand
description- – Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity of 1.79. Integrating under this money demand curve yields estimates of the welfare cost of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.
- – WP662
- – 2007-04-01
- – application/pdf
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