Results 1  10
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56
Monetary Policy under Uncertainty
 IN MICROFOUNDED MACROECONOMETRIC MODELS,Â NBER MACROECONOMICS ANNUAL
, 2005
"... We use a microfounded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then ..."
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Cited by 172 (9 self)
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We use a microfounded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination.
Inflation Stabilization and Welfare: The Case of a Distorted Steady State
, 2004
"... This paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered pricesetting. Rotemberg and Woodford (1997) and Woodford (2002) have shown that under certain conditions, a local approximation to the expected utility of the representative hous ..."
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Cited by 99 (16 self)
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This paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered pricesetting. Rotemberg and Woodford (1997) and Woodford (2002) have shown that under certain conditions, a local approximation to the expected utility of the representative household in a model of this kind is related inversely to the expected discounted value of a conventional quadratic loss function, in which each period’s loss is a weighted average of squared deviations of inflation and an output gap measure from their optimal values (zero). However, those derivations rely on an assumption of the existence of an output or employment subsidy that offsets the distortion due to the market power of monopolisticallycompetitive pricesetters, so that the steady state under a zeroinflation policy involves an efficient level of output. Here we show how to dispense with this unappealing assumption, so that a valid linearquadratic approximation to the optimal policy problem is possible even when the steady state is distorted to an arbitrary
Credit Frictions and Optimal Monetary Policy
, 2008
"... We extend the basic (representativehousehold) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive av ..."
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Cited by 99 (14 self)
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We extend the basic (representativehousehold) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion – a linear relation that should be maintained between the inflation rate and changes in the output gap — that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a “spreadadjusted Taylor rule, ” in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads.
Realtime model uncertainty in the United States: the Fed from 19962003
, 2005
"... We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model’s incepti ..."
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Cited by 31 (0 self)
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We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model’s inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylortype rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith.
Optimal taxation in an RBC model: A linearquadratic approach
 Journal of Economic Dynamics and
, 2006
"... We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. (1994, 1995), but using a linearquadratic (LQ) approximation to derive a loglinear approximation to the optimal policy rules. The example illustrates how inaccurate “naive ” ..."
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Cited by 23 (1 self)
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We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. (1994, 1995), but using a linearquadratic (LQ) approximation to derive a loglinear approximation to the optimal policy rules. The example illustrates how inaccurate “naive ” LQ approximation — in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household — can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method.
Optimal Monetary Policy Under Sudden Stop
, 2008
"... Emerging market economies often face sudden stops in capital inflows or reduced access to the international capital market. This paper analyzes what should monetary policy do in such an event. Optimal monetary policy induces a hike in interest rate and exchange rate depreciation. The latter mitigate ..."
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Cited by 20 (2 self)
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Emerging market economies often face sudden stops in capital inflows or reduced access to the international capital market. This paper analyzes what should monetary policy do in such an event. Optimal monetary policy induces a hike in interest rate and exchange rate depreciation. The latter mitigates the impact of the sudden stop in the domestic economy by boosting export revenues. In spite of that, a recession is not avoided. It is shown in the paper that the arrival of the sudden stop further increases the problem of time inconsistency of policy. Optimal policy is fairly well approximated by a flexible targeting rule, in which a combination of domestic prices, exchange rate and output is stabilized. We show that whether a fixed exchange rate regime is a good policy strategy, from a welfare perspective, depends on the economic environment. For the benchmark parameterization, the peg is the worst of simple rules considered. For alternative parameterizations, featuring low nominal rigidities or high elasticity of foreign demand, the fixed exchange rate regime performs relatively better.
Optimal Target Criteria for Stabilization Policy
, 2010
"... This paper considers a general class of nonlinear rationalexpectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model’s structural equations, (ii) strong enou ..."
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Cited by 17 (5 self)
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This paper considers a general class of nonlinear rationalexpectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model’s structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satis…ed by the projected paths of certain economically relevant “target variables.” It takes the same form at all times and generally involves only a small number of target variables, regardless of the size and complexity of the model. While the projected path of the economy requires information about the current state, the target criterion itself can be stated without reference to a complete description of the state of the world. We illustrate the application of the method to a nonlinear DSGE model with staggered pricesetting, in which the objective of policy is to maximize household expected utility.