Is inflation targeting best-practice monetary policy?

Monetary policy ; Inflation (Finance) ; Federal Open Market Committee

The Specification and Influence of Asset Markets

This paper is a chapter in the forthcoming Handbook of International Economics. It surveys the literature on the specification of models of asset markets and the implications of differences in specification for the macroeconomic adjustment process. Builders of portfolio balance models have generally employed "postulated" asset demand functions, rather than deriving these directly from micro foundations. The first major sec-tion of the paper lays out a postulated general specification of asset markets and summarizes the fundamental short-run results of portfolio balance models using a very basic specification of asset markets. Then,rudimentary specifications of a balance of payments equation and goods market equilibrium conditions are supplied, so that the dynamic distribution effects of the trade account under static and rational expectations with both fixed goods prices and flexible goods prices can be analyzed.The second major section of the paper surveys and analyzes microfoundation models of asset demands using stochastic calculus. The microeconomic theory of asset demands implies some but not all of the properties of the basic specification of postulated asset demands at the macrolevel. Since the conclusions of macroeconomic analysis depend crucially on the form of asset demand functions, it is important to continue to explore the implications of micro foundations for macro specification.

The benefits of expediting government gold sales

Additional gold can be made available either by mining at high cost (approximately $250 per ounce in 1997 dollars) or by mobilizing government stocks at zero cost. Governments own massive above‐ground stocks but loan out only a small percentage of these stocks. Making all government gold available for private uses immediately through some combination of sales and loans maximizes total welfare from private uses, a consequence of the first welfare theorem. We simulate a calibrated version of our model to quantify the effects of liquidating government stocks on alternative dates. If governments sell immediately rather than never, total welfare increases by$340 billion; if they make an unanticipated sale in 20 years, $105 billion of that amount is lost. By depressing prices, such sales benefit depletion and service users but injure private owners of stocks above and below‐ground. However, the injury to above‐ground stock owners is more than offset by the benefits to service users—often the same individuals. Mine owners would be the principal losers; however, they could be compensated (twice over) from government sales revenue without any need for tax increases.Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/142282/1/rfe235.pd

Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model

We demonstrate the existence of a monetary policy tradeoff between price-inflation variability and output-gap variability in an optimizing-agent model with staggered nominal wage and price contracts. This variance tradeoff is absent only in the special case in which prices are sticky and wages are perfectly flexible. When the model is calibrated to exhibit an empirically reasonable degreee of nominal wage inertia, strict inflation targeting induces substantial output-gap volatility.monetary policy tradeoff; price-inflation variability; output-gap variability;