Friedman's Money Supply Rule vs. Optimal Interest Rate Policy

Using New Keynesian models, we compare Friedman's k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality.We first review the recent literature.Open-loop interest rate rules are subject to indeterminacy and instability problems, but a properly chosen expectations-based rule yields determinacy and stability under learning, and implements optimal policy.We then show that Friedman's rule also can generate equilibria that are determinate and stable under learning.However, in computing the mean quadratic welfare loss, we find that for calibrated models Friedman's rule performs poorly compared to the optimal interest rate rule

Investigating the Monetary Policy of Central Banks with Assessment Indicators

This paper outlines a new method for using qualitative information to analyze the monetary policy strategy of central banks. Quantitative assessment indicators that are extracted from a central bank's public statements via the balance statistic approach are employed to estimate a Taylor-type rule. This procedure allows to directly capture a policymaker's assessments of macroeconomic variables that are relevant for its decision making process. As an application of the proposed method the monetary policy of the Bundesbank is re-investigated with a new dataset. One distinctive feature of the Bundesbank's strategy consisted of targeting growth in monetary aggregates. The analysis using the proposed method provides evidence that the Bundesbank indeed took into consideration monetary aggregates but also real economic activity and inflation developments in its monetary policy strategy since 1975

Evaluation of a DSGE Model of Energy in the United Kingdom Using Stationary Data

I examine the impact of energy price shock (oil prices shock and gas prices shock) on the economic activities in the United Kingdom using a dynamic stochastic general equilibrium model with a New Keynesian Philips Curve. I decomposed the changes in output caused by all of the stationary structural shocks. I found that the fall in output during the financial crisis period is driven by domestic demand shock, energy prices shock and world demand shock. I found the energy prices shock’s contribution to fall in output is temporary. Such that, the UK can borrow against such a temporary fall. This estimated model can create additional input to the policymaker’s choice of models

Central Bank Transparency under Model Uncertainty

This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the correct model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policie