This paper presents a simple New Keynesian model with alternative assumptions regarding the conduct of monetary policy. The central bank is assumed to either follow a Taylor rule or minimise a social welfare loss function. The model can be tractably described by means of a straightforward graphical apparatus, which, so far, has not been extended to include the treatment of the liquidity trap. The paper presents an analysis of the zero nominal interest rate bound using this apparatus and discusses the implications of pre-emptive monetary easing when the macroeconomic conditions suggest that the bound may restrict future monetary policy effectiveness.
{"title":"Liquidity Trap in an Inflation-Targeting Framework: A Graphical Analysis","authors":"P. Kapinos","doi":"10.2139/ssrn.1635266","DOIUrl":"https://doi.org/10.2139/ssrn.1635266","url":null,"abstract":"This paper presents a simple New Keynesian model with alternative assumptions regarding the conduct of monetary policy. The central bank is assumed to either follow a Taylor rule or minimise a social welfare loss function. The model can be tractably described by means of a straightforward graphical apparatus, which, so far, has not been extended to include the treatment of the liquidity trap. The paper presents an analysis of the zero nominal interest rate bound using this apparatus and discusses the implications of pre-emptive monetary easing when the macroeconomic conditions suggest that the bound may restrict future monetary policy effectiveness.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131365780","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that consumption habit often improves the ability of NKDSGE models to match output and consumption growth spectra. Nonetheless, the fit of NKDSGE models with consumption habit is susceptible to the source of the nominal rigidity, to spectra identified by permanent productivity shocks, to the frequencies used for evaluation, and to the choice of monetary policy rule. These vulnerabilities suggest that NKDSGE model specification is fragile.
{"title":"Business Cycle Implications of Internal Consumption Habit for New Keynesian Models","authors":"T. Kano, James M. Nason","doi":"10.2139/ssrn.2188987","DOIUrl":"https://doi.org/10.2139/ssrn.2188987","url":null,"abstract":"This paper studies the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that consumption habit often improves the ability of NKDSGE models to match output and consumption growth spectra. Nonetheless, the fit of NKDSGE models with consumption habit is susceptible to the source of the nominal rigidity, to spectra identified by permanent productivity shocks, to the frequencies used for evaluation, and to the choice of monetary policy rule. These vulnerabilities suggest that NKDSGE model specification is fragile.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122248363","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I summarize recent advances in the literature on inflation dynamics. This has been a very productive area of research due to the development of the so-called New Keynesian model and the availability of new macroeconomic and microeconomic evidence. Nevertheless, there still remain a number of puzzles. In particular, the importance of temporary price markdowns for inflation dynamics and the characteristics of the information set price setters use for their price adjustment decision, currently constitute unresolved issues.
{"title":"Understanding Inflation Dynamics: Where Do We Stand?","authors":"M. Dossche","doi":"10.2139/ssrn.1684013","DOIUrl":"https://doi.org/10.2139/ssrn.1684013","url":null,"abstract":"I summarize recent advances in the literature on inflation dynamics. This has been a very productive area of research due to the development of the so-called New Keynesian model and the availability of new macroeconomic and microeconomic evidence. Nevertheless, there still remain a number of puzzles. In particular, the importance of temporary price markdowns for inflation dynamics and the characteristics of the information set price setters use for their price adjustment decision, currently constitute unresolved issues.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"107 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-06-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125068014","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We ask how including endogenous capital formation into a New-Keynesian model affects optimal monetary policy. We find that the response of Ramsey optimal policy to a persistent cost-pushing shock is unconventional: In response to the shock, the central bank persistently reduces the nominal interest rate below its steady state. We find that this is due to a decrease in the natural interest rate and does not reflect a desire to choose a systematically different point on the policy frontier. However, the central bank’s tradeoff is affected in the sense that inflation stabilization can become more costly: When analyzing optimal simple rules, we find that these can imply welfare losses which substantially exceed those of Ramsey optimal policy. The reason is that active interest rate policy magnifies output fluctuations by destabilizing the capital stock. When introducing adjustment cost, our results return to standard: First, Ramsey optimal policy increases the interest rate as a response to a cost-pushing shock. Second, active policy becomes more successful in mimicking the allocation a Ramsey planner would choose.
{"title":"Should Central Banks Care about Investment?","authors":"Markus Hörmann","doi":"10.2139/ssrn.1414818","DOIUrl":"https://doi.org/10.2139/ssrn.1414818","url":null,"abstract":"We ask how including endogenous capital formation into a New-Keynesian model affects optimal monetary policy. We find that the response of Ramsey optimal policy to a persistent cost-pushing shock is unconventional: In response to the shock, the central bank persistently reduces the nominal interest rate below its steady state. We find that this is due to a decrease in the natural interest rate and does not reflect a desire to choose a systematically different point on the policy frontier. However, the central bank’s tradeoff is affected in the sense that inflation stabilization can become more costly: When analyzing optimal simple rules, we find that these can imply welfare losses which substantially exceed those of Ramsey optimal policy. The reason is that active interest rate policy magnifies output fluctuations by destabilizing the capital stock. When introducing adjustment cost, our results return to standard: First, Ramsey optimal policy increases the interest rate as a response to a cost-pushing shock. Second, active policy becomes more successful in mimicking the allocation a Ramsey planner would choose.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"46 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-06-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122669135","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The purpose of this paper is to determine the scale of economic shocks (SES), considering a new indicator based on the duration (in months) of contractions and expansions within Business Cycles and their amplitude, measured by GDP percent change based on chained 2000 dollars. Data of US Business cycles are used. The result is that the SES shows the real economic impact of contractions and expansions over time and serves as a warning signal that the economic system is entering into a turbulent state in the short-run.
{"title":"Business Cycles and the Scale of Economic Shock","authors":"M. Coccia","doi":"10.2139/SSRN.2581751","DOIUrl":"https://doi.org/10.2139/SSRN.2581751","url":null,"abstract":"The purpose of this paper is to determine the scale of economic shocks (SES), considering a new indicator based on the duration (in months) of contractions and expansions within Business Cycles and their amplitude, measured by GDP percent change based on chained 2000 dollars. Data of US Business cycles are used. The result is that the SES shows the real economic impact of contractions and expansions over time and serves as a warning signal that the economic system is entering into a turbulent state in the short-run.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-03-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114931643","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper shows that the elimination of the capital market by Walras' Law in the standard IS-LM textbook model hides an interesting aspect of the monetary transmission process of this model. If a look behind the curtain of the IS-LM-presentation of the Keynesian fixed price model is allowed for, this reveals that under quite plausible assumptions, monetary policy can cause a credit boom, which significantly increases its leverage. As is shown, the decisive role monetary policy plays this model is due to the fact that in a fixed price model without money, the interest rate is undetermined. This indeterminacy of the interest rate in the model without money, is the ultimate reason for the strong leverage that monetary policy can exert in the model with money. The analysis shows also that the IS-LM-version of the Keynesian fixed price model can be mathematically derived from different institutional setups of monetary policy, such as a setup, where monetary policy is conducted by open market operations, or a setup, where monetary policy is conducted by financing the government budget.
{"title":"The Hidden Credit Boom in IS-LM Monetary Policy Analysis","authors":"Rainer Maurer","doi":"10.2139/ssrn.1339175","DOIUrl":"https://doi.org/10.2139/ssrn.1339175","url":null,"abstract":"This paper shows that the elimination of the capital market by Walras' Law in the standard IS-LM textbook model hides an interesting aspect of the monetary transmission process of this model. If a look behind the curtain of the IS-LM-presentation of the Keynesian fixed price model is allowed for, this reveals that under quite plausible assumptions, monetary policy can cause a credit boom, which significantly increases its leverage. As is shown, the decisive role monetary policy plays this model is due to the fact that in a fixed price model without money, the interest rate is undetermined. This indeterminacy of the interest rate in the model without money, is the ultimate reason for the strong leverage that monetary policy can exert in the model with money. The analysis shows also that the IS-LM-version of the Keynesian fixed price model can be mathematically derived from different institutional setups of monetary policy, such as a setup, where monetary policy is conducted by open market operations, or a setup, where monetary policy is conducted by financing the government budget.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127091285","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper we attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, we follow a two-step estimation strategy. First, we model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model. We then impose the cross-equation restrictions of a Calvo pricing-based NKPC under non-zero steady-state inflation and estimate the structural parameters by minimising for each inflation state the distance between the restricted and unrestricted vector autoregressive parameters. The structural estimation results indicate that for all the economies there is evidence for a structurally invariant NKPC, albeit with a significant backward-looking component.
{"title":"Investigating the Structural Stability of the Phillips Curve Relationship","authors":"Jan J. J. Groen, H. Mumtaz","doi":"10.2139/ssrn.1280800","DOIUrl":"https://doi.org/10.2139/ssrn.1280800","url":null,"abstract":"The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper we attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, we follow a two-step estimation strategy. First, we model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model. We then impose the cross-equation restrictions of a Calvo pricing-based NKPC under non-zero steady-state inflation and estimate the structural parameters by minimising for each inflation state the distance between the restricted and unrestricted vector autoregressive parameters. The structural estimation results indicate that for all the economies there is evidence for a structurally invariant NKPC, albeit with a significant backward-looking component.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134357130","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The strong and sustained rise in oil prices observed in recent years poses a challenge to monetary policy and its ability to simultaneously achieve low inflation and stable output. Against this background, the paper studies monetary policy in a small open economy New Keynesian DSGE model including oil as a production input and a component of final demand. It investigates the performance of alternative price level definitions, notably headline and core CPI, in standard interest rate rules with respect to output and inflation stabilisation. The analysis puts special emphasis on the impact of price and real wage rigidity and their interaction on the policy trade-off induced by the oil price shock. While the degree of price rigidity alone is found to have little impact on the shock transmission and generates only small differences between alternative monetary strategies, the simulations suggest a more important role for real wage stickiness. Real wage stickiness triggers second round effects and complicates stabilisation whatever the policy rule. A focus on core inflation tends to limit the contraction of output in this context. The results also point to some interaction between nominal price and real wage rigidities. In the presence of real wage rigidity, greater price flexibility is found to be destabilising, as it amplifies the initial inflation effect of shocks, thereby triggering a stronger monetary policy response and a larger output effect.
{"title":"Oil Price Shocks, Rigidities and the Conduct of Monetary Policy: Some Lessons from a New Keynesian Perspective","authors":"R. Duval, L. Vogel","doi":"10.2139/ssrn.1124784","DOIUrl":"https://doi.org/10.2139/ssrn.1124784","url":null,"abstract":"The strong and sustained rise in oil prices observed in recent years poses a challenge to monetary policy and its ability to simultaneously achieve low inflation and stable output. Against this background, the paper studies monetary policy in a small open economy New Keynesian DSGE model including oil as a production input and a component of final demand. It investigates the performance of alternative price level definitions, notably headline and core CPI, in standard interest rate rules with respect to output and inflation stabilisation. The analysis puts special emphasis on the impact of price and real wage rigidity and their interaction on the policy trade-off induced by the oil price shock. While the degree of price rigidity alone is found to have little impact on the shock transmission and generates only small differences between alternative monetary strategies, the simulations suggest a more important role for real wage stickiness. Real wage stickiness triggers second round effects and complicates stabilisation whatever the policy rule. A focus on core inflation tends to limit the contraction of output in this context. The results also point to some interaction between nominal price and real wage rigidities. In the presence of real wage rigidity, greater price flexibility is found to be destabilising, as it amplifies the initial inflation effect of shocks, thereby triggering a stronger monetary policy response and a larger output effect.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"92 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116566059","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proposes a “logical experiment”, illustrating how alternative international monetary systems may produce opposite results in the global economy. In the current organisation, “key currencies” work as international money. Keynes, by contrast, proposed that this role should be assigned to a supranational, “credit” money. While the world currently lives in an asymmetric regime, which lead to what has been defined as a “balance of financial terror”, Keynes tried to achieve a more peaceful type of “international balance”. I argue that the structural reform and the technical provisions proposed by the “Keynes Plan” may still – at least in principle – provide useful remedies for international disequilibria, by remedying the asymmetries of the current international payments architecture and helping to curb both inflationary and deflationary pressures on the world economy.
{"title":"Current Global Imbalances and the Keynes Plan: A Keynesian Approach for Reforming the International Monetary System","authors":"L. Costabile","doi":"10.2139/ssrn.1330312","DOIUrl":"https://doi.org/10.2139/ssrn.1330312","url":null,"abstract":"This paper proposes a “logical experiment”, illustrating how alternative international monetary systems may produce opposite results in the global economy. In the current organisation, “key currencies” work as international money. Keynes, by contrast, proposed that this role should be assigned to a supranational, “credit” money. While the world currently lives in an asymmetric regime, which lead to what has been defined as a “balance of financial terror”, Keynes tried to achieve a more peaceful type of “international balance”. I argue that the structural reform and the technical provisions proposed by the “Keynes Plan” may still – at least in principle – provide useful remedies for international disequilibria, by remedying the asymmetries of the current international payments architecture and helping to curb both inflationary and deflationary pressures on the world economy.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127051710","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Despite being arguably one of the most active areas of research in heterodox macroeconomics, the study of the dynamic properties of stock-flow consistent (SFC) growth models of financially sophisticated economies is still in its early stages. This paper attempts to offer a contribution to this line of research by presenting a simplified Post-Keynesian SFC growth model with well-defined dynamic properties, and using it to shed light on the merits and limitations of the current heterodox SFC literature.
{"title":"A Simplified 'Benchmark' Stock-Flow Consistent (SFC) Post-Keynesian Growth Model","authors":"Claudio H. Dos Santos, G. Zezza","doi":"10.2139/ssrn.996489","DOIUrl":"https://doi.org/10.2139/ssrn.996489","url":null,"abstract":"Despite being arguably one of the most active areas of research in heterodox macroeconomics, the study of the dynamic properties of stock-flow consistent (SFC) growth models of financially sophisticated economies is still in its early stages. This paper attempts to offer a contribution to this line of research by presenting a simplified Post-Keynesian SFC growth model with well-defined dynamic properties, and using it to shed light on the merits and limitations of the current heterodox SFC literature.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"6 6","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-06-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132063460","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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