This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.
{"title":"A Post Keynesian Perspective on the Rise of Central Bank Independence: A Dubious Success Story in Monetary Economics","authors":"Joerg Bibow","doi":"10.2139/ssrn.1691706","DOIUrl":"https://doi.org/10.2139/ssrn.1691706","url":null,"abstract":"This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"59 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-10-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123968811","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 use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and efficient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inefficient allocation of labor. (ii) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the efficiency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.
{"title":"The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours","authors":"Luca Sala, Ulf Söderström, A. Trigari","doi":"10.2139/ssrn.1669949","DOIUrl":"https://doi.org/10.2139/ssrn.1669949","url":null,"abstract":"We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and efficient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inefficient allocation of labor. (ii) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the efficiency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116108899","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}
Recently there has been a resurgence in the utility of New Keynesian models in the world. The financial crisis has been in many ways a wakeup call for a large part of economics and the importance of this previously underrated field has been increasing. The neoclassical synthesis of macroeconomics with its emphasis on rational actors and perfect market clearing has been relegated to an interesting side note while Keynesian monetary policies are now in vogue. The recently emergent DSGE (Dynamic Stochastic General Equilibrium) models have emphasised this as well giving each theory their day in the sun. Even major policy making institutions such as the ECB are now using these DSGE models to figure out how they should approach policy challenges. We aim to look thus at two approaches that contain within themselves the seeds of ideological differences while preserving real world utility. This analysis aims to give an overview of the major aspects of the New Keynesian model and its implication towards policy setting in macroeconomic settings, including major importance placed on elements of inflation targeting, structural unemployment and monetary policy. We investigate the Aggregate Demand (henceforth "AD") and Aggregate Supply (henceforth "AS") constraints and will look at the stickiness of prices with the help of the model created by Guillermo Antonio Calvo, the "Calvo pricing" model. Our emphasis will be two-fold. First will be to look at the mathematics underlying the sticky price New Keynesian model and understand its importance and applicability to the present day macroeconomic scenario. Second would be to look at the variety of areas in which this type of analysis might be inapplicable and to analyse the shortcomings of such an approach.
最近，新凯恩斯主义模型在世界范围内的应用又重新抬头。从很多方面来说，金融危机给经济学的很大一部分敲响了警钟，而这一此前被低估的领域的重要性一直在上升。强调理性行为者和完美市场出清的新古典综合宏观经济学，在凯恩斯主义货币政策盛行之际，已经沦为有趣的旁注。最近出现的DSGE(动态随机一般均衡)模型也强调了这一点，使每种理论都有了自己的发展前景。就连欧洲央行这样的主要政策制定机构，现在也在使用这些DSGE模型来确定它们应该如何应对政策挑战。因此，我们的目标是研究两种方法，它们既包含意识形态差异的种子，又保留了现实世界的效用。本分析旨在概述新凯恩斯主义模型的主要方面及其对宏观经济环境中政策制定的影响，包括对通货膨胀目标、结构性失业和货币政策要素的重要重视。我们研究了总需求(以下简称“AD”)和总供给(以下简称“AS”)约束，并将借助吉列尔莫·安东尼奥·卡尔沃(Guillermo Antonio Calvo)创建的“卡尔沃定价”模型来研究价格的粘性。我们的重点将是双重的。首先，我们来看看黏性价格新凯恩斯模型背后的数学原理，并理解它对当前宏观经济情景的重要性和适用性。第二是研究这种类型的分析可能不适用的各种领域，并分析这种方法的缺点。
{"title":"Keynesian Macrodynamics - Two Models","authors":"R. Krishnan","doi":"10.2139/ssrn.1611534","DOIUrl":"https://doi.org/10.2139/ssrn.1611534","url":null,"abstract":"Recently there has been a resurgence in the utility of New Keynesian models in the world. The financial crisis has been in many ways a wakeup call for a large part of economics and the importance of this previously underrated field has been increasing. The neoclassical synthesis of macroeconomics with its emphasis on rational actors and perfect market clearing has been relegated to an interesting side note while Keynesian monetary policies are now in vogue. The recently emergent DSGE (Dynamic Stochastic General Equilibrium) models have emphasised this as well giving each theory their day in the sun. Even major policy making institutions such as the ECB are now using these DSGE models to figure out how they should approach policy challenges. We aim to look thus at two approaches that contain within themselves the seeds of ideological differences while preserving real world utility. This analysis aims to give an overview of the major aspects of the New Keynesian model and its implication towards policy setting in macroeconomic settings, including major importance placed on elements of inflation targeting, structural unemployment and monetary policy. We investigate the Aggregate Demand (henceforth \"AD\") and Aggregate Supply (henceforth \"AS\") constraints and will look at the stickiness of prices with the help of the model created by Guillermo Antonio Calvo, the \"Calvo pricing\" model. Our emphasis will be two-fold. First will be to look at the mathematics underlying the sticky price New Keynesian model and understand its importance and applicability to the present day macroeconomic scenario. Second would be to look at the variety of areas in which this type of analysis might be inapplicable and to analyse the shortcomings of such an approach.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125579428","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 investigates optimal monetary policy in response to fundamental innovations that affect asset prices. The fundamental innovations considered include productivity, investment efficiency, taste and bankruptcy cost innovations. I find that a central bank can stabilise the economy well when faced with such innovations, without attempting to stabilise asset prices. However, in addition to the output gap and inflation, monetary policy must also take into consideration the effects of these shocks on the capital gap as well. The results are robust to the inclusion of a demand-side credit friction in the New Keynesian model, if this friction is small.
{"title":"Optimal Monetary Policy with Fundamental Shifts in Asset Prices","authors":"J. Hansen","doi":"10.2139/ssrn.1600707","DOIUrl":"https://doi.org/10.2139/ssrn.1600707","url":null,"abstract":"This paper investigates optimal monetary policy in response to fundamental innovations that affect asset prices. The fundamental innovations considered include productivity, investment efficiency, taste and bankruptcy cost innovations. I find that a central bank can stabilise the economy well when faced with such innovations, without attempting to stabilise asset prices. However, in addition to the output gap and inflation, monetary policy must also take into consideration the effects of these shocks on the capital gap as well. The results are robust to the inclusion of a demand-side credit friction in the New Keynesian model, if this friction is small.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-05-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116405241","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 examine when government debt crowds out investment for the U.S. economy using an estimated New Keynesian model with a detailed fiscal specification. The estimation accounts for the interaction between monetary and fiscal policies. Whether private investment is crowded in or out in the short term depends on the fiscal or monetary shock that triggers a debt expansion: Higher debt can crowd in investment despite a higher real interest rate for a reduction in capital tax rates or an increase in productive government investment. Contrary to the conventional view of crowding out, no systematic relationship among debt, the real interest rate, and investment exists. This result offers an explanation as to why empirical studies that have focused on the reduced-form relationship between interest rates and debt are often inconclusive. At longer horizons, distortionary financing is important for the negative investment response to a debt expansion.
{"title":"When Does Government Debt Crowd Out Investment?","authors":"Nora Traum, Shu-Chun S. Yang","doi":"10.2139/ssrn.1611196","DOIUrl":"https://doi.org/10.2139/ssrn.1611196","url":null,"abstract":"We examine when government debt crowds out investment for the U.S. economy using an estimated New Keynesian model with a detailed fiscal specification. The estimation accounts for the interaction between monetary and fiscal policies. Whether private investment is crowded in or out in the short term depends on the fiscal or monetary shock that triggers a debt expansion: Higher debt can crowd in investment despite a higher real interest rate for a reduction in capital tax rates or an increase in productive government investment. Contrary to the conventional view of crowding out, no systematic relationship among debt, the real interest rate, and investment exists. This result offers an explanation as to why empirical studies that have focused on the reduced-form relationship between interest rates and debt are often inconclusive. At longer horizons, distortionary financing is important for the negative investment response to a debt expansion.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"84 1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134214667","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}
Pub Date : 2010-03-01DOI: 10.5089/9781451982664.001
Maral Shamloo
Reconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks. Meanwhile, the responses to sectorspecific shocks are similar. Second, the standard price setting models are unable to quantitatively match the amount of monetary non-neutrality observed in the data. I argue, First, that the input-output linkages in production generate different responses to aggregate shocks across sectors. Second, calibrating this model to the US data can create five times more monetary non-neutrality in response to nominal shocks compared to an equivalent homogeneous economy with intermediate inputs. Finally, the model implies that upstream industries respond faster to aggregate shocks compared to downstream industries. I show that this prediction is supported by the data.
{"title":"Price Setting in a Model with Production Chains: Evidence from Sectoral Data","authors":"Maral Shamloo","doi":"10.5089/9781451982664.001","DOIUrl":"https://doi.org/10.5089/9781451982664.001","url":null,"abstract":"Reconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks. Meanwhile, the responses to sectorspecific shocks are similar. Second, the standard price setting models are unable to quantitatively match the amount of monetary non-neutrality observed in the data. I argue, First, that the input-output linkages in production generate different responses to aggregate shocks across sectors. Second, calibrating this model to the US data can create five times more monetary non-neutrality in response to nominal shocks compared to an equivalent homogeneous economy with intermediate inputs. Finally, the model implies that upstream industries respond faster to aggregate shocks compared to downstream industries. I show that this prediction is supported by the data.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125424828","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}
Lawrence J. Christiano, M. Trabandt, Karl Walentin
We propose a monetary model in which the unemployed satisfy the official U.S. definition of unemployment: people without jobs who are (1) currently making concrete efforts to find work and (2) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (that is, unemployment is involuntary). We integrate our model of involuntary unemployment into the simple new Keynesian framework with no capital and use the resulting model to discuss the concept of the nonaccelerating inflation rate of unemployment. We then integrate the model into a medium-sized DSGE model with capital and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to the three shocks.
{"title":"Involuntary Unemployment and the Business Cycle","authors":"Lawrence J. Christiano, M. Trabandt, Karl Walentin","doi":"10.2139/ssrn.1601884","DOIUrl":"https://doi.org/10.2139/ssrn.1601884","url":null,"abstract":"We propose a monetary model in which the unemployed satisfy the official U.S. definition of unemployment: people without jobs who are (1) currently making concrete efforts to find work and (2) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (that is, unemployment is involuntary). We integrate our model of involuntary unemployment into the simple new Keynesian framework with no capital and use the resulting model to discuss the concept of the nonaccelerating inflation rate of unemployment. We then integrate the model into a medium-sized DSGE model with capital and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to the three shocks.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"135 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116914961","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}
Pub Date : 2010-03-01DOI: 10.5089/9781451982091.001
A. Berg, Tokhir N Mirzoev, Rafael A. Portillo, Luis-Felipe Zanna
We develop a tractable open-economy new-Keynesian model with two sectors to analyze the short-term effects of aid-financed fiscal expansions. We distinguish between spending the aid, which is under the control of the fiscal authorities, and absorbing the aid-using the aid to finance a higher current account deficit-which is influenced by the central bank's reserves policy when access to international capital markets is limited. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, in contrast, a policy mix that results in spending but not absorbing the aid generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation if demand pressures are strong enough to threaten external balance. Certain features of low income countries, such as limited participation in domestic financial markets, make a real depreciation more likely by amplifying demand pressures when aid is spent but not absorbed. The results from our model can help understand the recent experience of Uganda, which saw an increase in government spending following a surge in aid yet experienced a real depreciation and an increase in real interest rates.
{"title":"The Short-Run Macroeconomics of Aid Inflows: Understanding the Interaction of Fiscal and Reserve Policy","authors":"A. Berg, Tokhir N Mirzoev, Rafael A. Portillo, Luis-Felipe Zanna","doi":"10.5089/9781451982091.001","DOIUrl":"https://doi.org/10.5089/9781451982091.001","url":null,"abstract":"We develop a tractable open-economy new-Keynesian model with two sectors to analyze the short-term effects of aid-financed fiscal expansions. We distinguish between spending the aid, which is under the control of the fiscal authorities, and absorbing the aid-using the aid to finance a higher current account deficit-which is influenced by the central bank's reserves policy when access to international capital markets is limited. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, in contrast, a policy mix that results in spending but not absorbing the aid generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation if demand pressures are strong enough to threaten external balance. Certain features of low income countries, such as limited participation in domestic financial markets, make a real depreciation more likely by amplifying demand pressures when aid is spent but not absorbed. The results from our model can help understand the recent experience of Uganda, which saw an increase in government spending following a surge in aid yet experienced a real depreciation and an increase in real interest rates.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"80 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131246522","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}
Banks’ liquidity is a crucial determinant of the adversity of banking crises. In this paper, we consider the effect of fire sales and entry during crises on banks’ ex-ante choice of liquid asset holdings. We consider a setting with limited pledgeability of risky cash flows relative to safe ones and a differential expertise between banks and outsiders in employing banking assets. When a large number of banks fail, market for assets clears only at fire-sale prices and outsiders enter the market if prices fall sufficiently low. In such states, there is a private benefit of liquid holdings to banks from purchasing assets. There is also a social benefit since greater banking system liquidity reduces inefficiency from liquidation of assets to outsiders. When pledgeability of risky cash flows is high, for instance, in countries with well-developed capital markets, banks hold less liquidity than is socially optimal due to risk-shifting incentives; otherwise, banks may hold even more liquidity than is socially optimal to capitalise on fire sales. However, if there is a systemic cost associated with crises, for example, in the form of fiscal costs associated with provision of deposit insurance, then socially optimal liquidity may always be higher than the privately optimal one, and, in turn, regulation in the form of prudent liquidity requirements may be desirable. We provide some international evidence on banks’ liquid holdings that is consistent with model’s predictions.
{"title":"Endogenous Choice of Bank Liquidity: The Role of Fire Sales","authors":"V. Acharya, H. Shin, Tanju Yorulmazer","doi":"10.2139/ssrn.1517693","DOIUrl":"https://doi.org/10.2139/ssrn.1517693","url":null,"abstract":"Banks’ liquidity is a crucial determinant of the adversity of banking crises. In this paper, we consider the effect of fire sales and entry during crises on banks’ ex-ante choice of liquid asset holdings. We consider a setting with limited pledgeability of risky cash flows relative to safe ones and a differential expertise between banks and outsiders in employing banking assets. When a large number of banks fail, market for assets clears only at fire-sale prices and outsiders enter the market if prices fall sufficiently low. In such states, there is a private benefit of liquid holdings to banks from purchasing assets. There is also a social benefit since greater banking system liquidity reduces inefficiency from liquidation of assets to outsiders. When pledgeability of risky cash flows is high, for instance, in countries with well-developed capital markets, banks hold less liquidity than is socially optimal due to risk-shifting incentives; otherwise, banks may hold even more liquidity than is socially optimal to capitalise on fire sales. However, if there is a systemic cost associated with crises, for example, in the form of fiscal costs associated with provision of deposit insurance, then socially optimal liquidity may always be higher than the privately optimal one, and, in turn, regulation in the form of prudent liquidity requirements may be desirable. We provide some international evidence on banks’ liquid holdings that is consistent with model’s predictions.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-11-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129706095","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 estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.
{"title":"Testing the Structural Interpretation of the Price Puzzle with a Cost Channel Model","authors":"Efrem Castelnuovo","doi":"10.2139/ssrn.1513202","DOIUrl":"https://doi.org/10.2139/ssrn.1513202","url":null,"abstract":"We estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.","PeriodicalId":127579,"journal":{"name":"ERN: Keynes; Keynesian; Post-Keynesian (Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-11-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122651552","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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