Optimal monetary policy in a regime-switching economy

This paper is of interest for two reasons. First, it provides a simple algorithm for solving an optimal control problem in which the law of motion of the economy is a Markov regime-switching vector autoregression. Second, it applies this algorithm to study optimal monetary policy in a stylised small open economy model, which alternates randomly between two states: a `no-bubble' regime, in which the exchange rate fluctuates, in a stationary way, around its long-run equilibrium; and a `bubble' regime, in which the exchange rate (absent any offsetting impact of policy or exogenous shocks) increasingly deviates from it. We compute the optimal policy rule for this economy, as opposed to an optimised reaction function. This rule is regime-contingent in that policy response varies according to whether the economy is experiencing a bubble or not. The main results are as follows. First, while the optimal weights on output and inflation do not vary much between regimes, the optimal reaction to the asset price is highly dependent on the regime as well as the stochastic properties of the bubble. Second, uncertainty about the regime makes policy more cautious. Third, a policymaker uncertain about the true stochastic properties of the asset price tends to obtain a `robust' performance (i.e. minmax outcome) by responding little to the asset price. Finally, over-estimating the probability of an incipient bubble is generally more costly than under-estimating itasset prices; policy rules; asymmetric risk

Time Consistent Policy in Markov Switching Models

In this paper we consider the quadratic optimal control problem with regime shifts and forward-looking agents. This extends the results of Zampolli (2003) who considered models without forward-looking expectations. Two algorithms are presented: The first algorithm computes the solution of a rational expectation model with random parameters or regime shifts. The second algorithm computes the time-consistent policy and the resulting Nash-Stackelberg equilibrium. The formulation of the problem is of general form and allows for model uncertainty and incorporation of policymaker’s judgement. We apply these methods to compute the optimal (non-linear) monetary policy in a small open economy subject to (symmetric or asymmetric) risks of change in some of its key parameters such as inflation inertia, degree of exchange rate pass-through, elasticity of aggregate demand to interest rate, etc.. We normally find that the time-consistent response to risk is more cautious. Furthermore, the optimal response is in some cases non-monotonic as a function of uncertainty. We also simulate the model under assumptions that the policymaker and the private sector hold the same beliefs over the probabilities of the structural change and different beliefs (as well as different assumptions about the knowledge of each other’s reaction function).monetary policy, regime switching, model uncertainty, time consistency

Welfare implications of joining a common currency

This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries’ supply shocks and the larger the variance of real exchange rate shocks. JEL Classification: E52, E58, F33, F40Balassa-Samuelson Effect, Currency union, monetary policy, Welfare

Production of He-4 and (4) in Pb-Pb collisions at root(NN)-N-S=2.76 TeV at the LHC

Results on the production of He-4 and (4) nuclei in Pb-Pb collisions at root(NN)-N-S = 2.76 TeV in the rapidity range vertical bar y vertical bar <1, using the ALICE detector, are presented in this paper. The rapidity densities corresponding to 0-10% central events are found to be dN/dy4(He) = (0.8 +/- 0.4 (stat) +/- 0.3 (syst)) x 10(-6) and dN/dy4 = (1.1 +/- 0.4 (stat) +/- 0.2 (syst)) x 10(-6), respectively. This is in agreement with the statistical thermal model expectation assuming the same chemical freeze-out temperature (T-chem = 156 MeV) as for light hadrons. The measured ratio of (4)/He-4 is 1.4 +/- 0.8 (stat) +/- 0.5 (syst). (C) 2018 Published by Elsevier B.V.Peer reviewe

Essays on business cycles, nominal rigidities and macroeconomic uncertainty

Available from British Library Document Supply Centre- DSC:DXN062864 / BLDSC - British Library Document Supply CentreSIGLEGBUnited Kingdo

Optimal monetary policy in a regime-switching economy: the response to abrupt shifts in exchange rate dynamics

This paper examines the trade-offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse. The economy is modelled as switching randomly between different regimes according to time-invariant transition probabilities. We compute both the optimal regime-switching control rule for this economy and optimised linear Taylor rules, in the two cases where the transition probabilities are known with certainty and where they are uncertain. The simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of (asymmetric) additive and multiplicative uncertainty. An interesting finding is that policies based on robust (minmax) values of the transition probabilities are usually more conservative.