Taylor-type rules and total factor productivity

This paper examines the impact of a persistent shock to the growth rate of total factor productivity in a New Keynesian model in which the central bank does not observe the shock. The authors then investigate the performance of alternative policy rules in such an incomplete information environment. While some rules perform better than others, the authors demonstrate that inflation is more stable after a persistent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). Both the output growth and price-level path rules generate less volatility in output and inflation following a persistent productivity shock compared with the Taylor rule.Taylor's rule ; Productivity ; Industrial productivity

Aggregate disturbances, monetary policy, and the macroeconomy: the FRB/US perspective

The FRB/US macroeconometric model of the U.S. economy was created at the Federal Reserve Board for use in policy analysis and forecasting. This article begins with an examination of the model's characterization of the monetary transmission mechanism -- the chain of relationships describing how monetary policy actions influence financial markets and, in turn, output and inflation. The quantitative nature of this mechanism is illustrated by estimates of the effect of movements in interest rates and other factors on spending in different sectors and by simulations of the effect of a change in the stance of policy on the economy as a whole. After the discussion of the transmission mechanism, the article considers the influence of monetary policy on the macroeconomic consequences of specific events by showing how the predicted effects of selected disturbances change under alternative policy responses. These examples illustrate an important policy tradeoff in the FRB/US model involving the variability (but not the level) of output and inflation: Past some point, lower variability in inflation can be obtained only at the expense of greater fluctuations in output and interest rates.Forecasting ; Macroeconomics ; Monetary policy

Macroeconomic Modelling and the Effects of Policy Reforms: an Assessment for Italy using ITEM and

In this paper we compare the dynamic properties of the Italian Treasury Econometric Model (ITEM) with those of QUEST III, the endogenous growth model of the European Commission (DG ECFIN) in the version calibrated for Italy. We consider an array of shocks often examined in policy simulations and investigate their implications on macro variables. In doing so, we analyse the main transmission channels in the two models and provide a comparative assessment of the magnitude and the persistence of the effects, trying to ascertain whether the responses to shocks are consistent with the predictions of economic theory. We show that, despite substantial differences between the two models, the responses of the key variables are qualitatively similar when we consider competition enhancing policies and labour productivity improvements. On the other hand, we observe quantitative disparities between the two models, mainly due to the forward-looking behaviour and the endogenous growth mechanism incorporated into the QUEST model but not in ITEM. The simulation results show that Quest III is a powerful tool to capture the effects of structural economic reforms, like competitionenhancing policies or innovation-promoting policies. On the other hand, owing to the breakdown of fiscal variables in a large number of components, ITEM is arguably more suitable for the quantitative evaluation of fiscal policy and the study of the impact of reforms on the public sector balance sheet.Economic Modelling, DSGE, Structural Reforms, Italy

Growth Expectation

For a long time, changes in expectations about the future have been thought to be significant sources of economic fluctuations, as argued by Pigou (1926). Although creating such an expectation-driven cycle (the Pigou cycle) in equilibrium business cycle models was considered to be a difficult challenge, as pointed out by Barro and King (1984), recently, several researchers have succeeded in producing the Pigou cycle by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Seminal research by Christiano, Ilut, Motto and Rostagno (2007) explains the gstock market boom-bust cycles,h characterized by increases in consumption, labor inputs, investment and the stock prices relating to high expected future technology levels, by introducing investment growth adjustment costs, habit formation in consumption, sticky prices and an inflation-targeting central bank. We, however, show that such a cycle is difficult to generate based on ggrowth expectation,h which reflect expectations of higher productivity growth rates. Thus, Barro and King's (1984) prediction still applies.Expectations, Equilibrium Business Cycle, Technological Progress

Are export promotion and trade liberalization good for Latin America's poor? : a comparative macro-micro CGE analysis

Latin America;trade liberalization;export promotion

A learning hypothesis of the term structure of interest rates

Recent empirical results about the US term structure are difficult to reconcile with the classical hypothesis of rational expectations even if time-varying but stationary term premia are allowed for. A hypothesis of rational learning about the conditional variance of the log pricing kernel is put forward. In a simple, illustrative consumption-based asset pricing model the long-term interest rate turns out to have an economic meaning distinct from both price stability and full employment, namely to measure the market perception of aggregate level of future risk in the economy. Implications for economic modeling and monetary policy are explored.term structure; interest rate; learning; uncertainty; monetary policy