Is increased price flexibility stabilizing? The role of the permanent income hypothesis

Prices ; Income

Forecasting M2 growth: an exploration in real time

Evan Koenig presents a model that has proved successful at reproducing the pattern of M2 growth over the first half of the decade of the 1990s. The model suggests that a large gap between long-term bond yields and M2 deposit rates contributed importantly to the slow money growth that persisted through the end of 1994. The increased availability of bond market mutual funds may also have played a role in the money growth slowdown. The model can be combined with real-time published forecasts of spending and interest rates to yield predictions of future changes in money growth. It has generally performed well in this regard. However, in 1995 a sharp flattening of the yield curve led to a more-pronounced-than-expected acceleration of M2 growth, calling the future forecasting performance of the model into question. Results for an M2 aggregate expanded to include household bond funds are similar.Money supply

Capacity utilization as a real-time predictor of manufacturing output

In this article, Evan F. Koenig demonstrates that the Federal Reserve Board's initial estimate of manufacturing capacity utilization is helpful in predicting subsequent growth in manufacturing output. Together with lagged real-time output growth and growth in the composite index of leading indicators, capacity utilization explains more than 50 percent of the variation in output growth at a four-quarter horizon. Based on data available at the beginning of the year, the forecasting equation predicts little or no growth in manufacturing output during 1996.Industrial capacity ; Manufactures

Monetary policy: on the right track?

Federal funds rate ; Employment (Economic theory) ; Inflation (Finance)

What's new about the new economy? : some lessons from the current expansion

Economic conditions - United States ; Economic stabilization

Nominal feedback rules for monetary policy: some comments

Monetary policy - United States

An IS-LM analysis of the zero-bound problem

Policy options for stimulating real activity are limited once short-term interest rates have been driven to zero. Monetary policy makers face the difficult challenge of preventing or reversing declines in near-term inflation expectations while preserving confidence in the central bank's commitment to long-term price stability. Fiscal policy makers must commit to a credible plan for maintaining or raising near-term government purchases while minimizing increases in future marginal tax rates.Price levels ; Monetary policy ; Fiscal policy

Optimal monetary policy in an economy with sticky nominal wages

In this article, Evan Koenig derives the optimal monetary policy rule for an economy with contractual wage agreements. The optimal rule has the monetary authority target a weighted average of aggregate output and the price level. In a realistic special case, the optimal rule calls for the monetary authority to target aggregate nominal spending. The optimal rule is quite general in form, encompassing policy proposals made by such prominent economists as Robert Hall and John Taylor. ; Koenig points out that if the monetary authority responds optimally to economic shocks, it will be difficult to distinguish the effects of monetary policy from the effects of the shocks themselves. So, the important contribution that monetary policy makes to the economy may easily be overlooked. Paradoxically, only insofar as monetary policy is implemented with error will it be apparent that monetary policy matters.Monetary policy ; Wages

Monetary policy, financial stability, and the distribution of risk

In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal-income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.Debt ; Inflation risk

Are the permanent-income model of consumption and the accelerator model of investment compatible?

Consumption (Economics) ; Interest rates ; Saving and investment