1,720,976 research outputs found
The timeless perspective vs. discretion: theory and monetary policy implications for an open economy
Get PDFThis paper proposes an open-economy Phillips Curve that features a real exchange rate channel. The resulting target rule under optimal policy from a timeless perspective (TP) involves additional history dependence in the form of lagged inflation. The target rule also depends on the discount factor as well as IS and Phillips Curve parameters. This is in sharp contrast to a closed economy where the target rule depends only on the change in the output gap, the current rate of inflation and the structural parameter in the Phillips Curve. Because of the additional history dependence in an open economy, price level targeting is no longer consistent with optimal policy. If a real exchange rate channel does not exist in the Phillips Curve, monetary policy eases in the wake of a positive cost-push disturbance under policy from a TP and is thus diametrically opposed to same under discretion. Maximum gains accrue from commitment relative to discretion in an open economy where the real exchange rate is absent from the Phillips Curve and the policymaker places strong emphasis on maintaining price stability. --Timeless Perspective,Discretion,Price Level Targeting,Exchange Rate Channel
"Leaning with the wind"? An open-economy example
No full textThis paper uses a forward-looking open-economy optimizing model to show that the existence of a real exchange rate channel in the Phillips Curve dramatically alters the conduct of optimal monetary policy. The central bank's optimal reaction function can produce a "lean with the wind" response to domestic IS disturbances and the foreign output gap provided that both a pronounced exchange rate channel exists and the disturbances are highly persistent. The more potent the real exchange rate channel in the Phillips Curve becomes, the greater (smaller) the fluctuations in the output gap (real exchange rate). How this channel affects the variability of the nominal variables depends on the degree of persistence of the disturbances.
The Output-Inflation Tradeoff in the United States: Evidence on the New Classical vs. New Keynesian Debate
Get PDFThe empirical examination of the output-inflation tradeoff in the United States over a 30 year period reveals that both aggregate uncertainty and average inflation were instrumental in shaping the output-inflation tradeoff. The division of the whole sample period into two distinct sets of subintervals suggests that the New Keynesian view according to which the output-inflation tradeoff is sensitive to changes in average inflation held only unambiguously in the latter part of the respective sample period. The empirical results suggest further that the tradeoff appears to have been sensitive only to changes in aggregate uncertainty in the early part of the sample period, a fact consistent with the New Classical view
Is There a Bank Lending Channel of Monetary Policy in New Zealand?
Get PDFThe effectiveness of the bank lending channel of monetary policy hinges on the extent to which changes in the availability of bank credit relative to non-bank credit are systematically transmitted to the real sector of the economy. On this count, there is no evidence of a link between three finance mix ,variables and economic activity in New Zealand during selected intervals over the 1967-87 period. Similar, unfavourable results are reported by the investigation of the connection between movements in an interest rate spread and real economic performance between 1975 and 1994. Moreover, neither the finance mix variable nor the spread respond consistently to changes in various indicators of monetary policy. The results reported in the paper cast serious doubt on the existence of a potent bank lending channel of monetary policy in New Zealand either before or after the reforms of the mid-1980s
Optimal discretionary monetary policy in the open economy: Choosing between CPI and domestic inflation as target variables
Get PDFIn open economy, a choice can be made between two measures of inflation for use as a target variable: CPI inflation or domestic inflation. This paper considers flexible and strict inflation targeting strategies and explores the circumstances under which a domestic inflation target is preferred to a CPI inflation target. This is done from the perspectives of the central bank and society as a whole. The quantitative results of this paper indicate that under suitable conditions the temporal properties of stochastic disturbances are instrumental in determining which inflation target is preferred. The choice of target variable from society’s viewpoint coincides almost perfectly with the choice of the central bank if the utility of the representative household serves as the welfare criterion for society. If qualitative aspects matter in the choice inflation target, then the role of temporal properties of the stochastic disturbances becomes less prominent. Policy conclusions are drawn with the help of a forward-looking model for a small open economy. This model has proper micro-foundations and exhibits two important features. First, the degree of openness affects the parameters of the IS relation and, second, under domestic inflation targeting, the existence of a direct exchange rate channel in the Phillips Curve impairs the perfect stabilising properties of monetary policy in the presence of demand-side disturbances.monetary policy; inflation target
The New Classical vs the New Keynesian Debate on the Output-Inflation Tradeoff: Evidence from Four Industrialized Countries
Get PDFBased on quarterly data for Canada, Germany, the United Kingdom, and the United States, this paper tests the New Classical view against the extended New Keynesian view about the factors underlying the output-inflation tradeoff. The simple Lucas is amended to reflect the presence of serial correlation in nominal aggregate demand shocks. We find that the mean rate of inflation has a statistically significant negative effect on the coefficient of the anticipated component of nominal aggregate demand shocks in all four countries and a statistically significant negative effect on the coefficient of the unanticipated component in every country but Germany. Aggregate volatility affects the output-inflation tradeoff in two of the four countries. These findings are in line with the New Keynesian view but cast serious doubts on the New Classical view
The timeless perspective vs. discretion: theory and monetary policy implications for an open economy
No full textThis paper proposes an open-economy Phillips Curve that features a real exchange rate channel. The resulting target rule under optimal policy from a timeless perspective (TP) involves additional history dependence in the form of lagged inflation. The target rule also depends on the discount factor as well as IS and Phillips Curve parameters. This is in sharp contrast to a closed economy where the target rule depends only on the change in the output gap, the current rate of inflation and the structural parameter in the Phillips Curve. Because of the additional history dependence in an open economy, price level targeting is no longer consistent with optimal policy. If a real exchange rate channel does not exist in the Phillips Curve, monetary policy eases in the wake of a positive cost-push disturbance under policy from a TP and is thus diametrically opposed to same under discretion. Maximum gains accrue from commitment relative to discretion in an open economy where the real exchange rate is absent from the Phillips Curve and the policymaker places strong emphasis on maintaining price stability
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