Pitfalls of monetary policy under incomplete information: imprecise indicators and real indeterminacy

Can a strategy of targeting macro projections be the only guide for monetary policy actions, or could it cause macroeconomic instability in the face of imprecise information? The paper examines how the precision of the indicators affects determinacy in a model with partial information and an optimizing central bank. When the information on endogenous variables is noisy, the central bank acts too timidly and sunspots arise; relying on information on exogenous variables such as potential output can also induce too much caution in response to inflation. Simple rules which impose a large reaction to nominal variables, irrespective of their information content, may be needed to supply an anchor for prices. Appointing a “conservative” central banker may also be appropriate in presence of large uncertainty, irrespective of time inconsistency considerations, as he responds less timidly to signs of inflation or deflation when their interpretation is difficult.Monetary policy, information variables, incomplete information.

Pitfalls of monetary policy under incomplete information: imprecise indicators and real indeterminacy

The paper examines the link between the precision of the available monetary policy indicators and the determinacy of equilibrium in a forward-looking macroeconomic model with partial information and an optimizing central bank. When the information on endogenous variables is not precise enough, the central bank acts too timidly; there is a possibility of self-fulfilling fluctuations in inflation and output. It is argued that, unless they are very precise, projections of output or inflation over the relevant horizon cannot be the only criterion for determining monetary policy actions. Rules which include a sufficient reaction to nominal variables may be necessary to supply an anchor for prices, even when the policymaker intends to consider all relevant information. Appointing a “conservative” central banker may also induce a less timid response to signs of inflation or deflation, even when their interpretation is difficult. In contrast, relying too much on measures of exogenous variables, such as potential output, can be counter-productive, because it could induce an attitude that is not responsive enough to inflation or deflation.Monetary policy, information variables, incomplete information

Has globalisation changed the Phillips curve? Firm-level evidence on the effect of activity on prices

The flattening of the Phillips curve observed in the industrial countries has been attributed to globalisation, while the traditional explanation centres on monetary policy credibility. The empirical literature is not conclusive, since macroeconomic data are affected by substantial identification problems. This paper argues that recourse to micro data is needed to identify structural changes in the slope of the Phillips curve. Taking advantage of a unique dataset including about 2,000 Italian firms, the paper tests whether a change in the link between capacity utilisation and prices is confirmed at company level, after controlling for inflation expectations, and whether it is concentrated among those firms that are more exposed to globalisation on either the product or the labour market. The answer is negative in all cases. The results do not support the view that the flattening of the Phillips curve is due to globalisation.Phillips curve, globalisation, inflation, monetary policy

Pricing behavior and the introduction of the euro: evidence from a panel of restaurants

This paper assembles an original panel of data from 2,500 restaurants in Italy over 1998-2004, with the objective of studying whether the euro cash changeover had an impact on individual pricing behavior, as apparently perceived by consumers, and which economic mechanisms may explain it. On the first point, the data show that only about a price increase of 3-4 percentage points can be attributed to the new currency; the changeover focussed the public attention over a medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. On the second point, we reach two conclusions. We find evidence consistent with the existence of “menu-costs”: during the changeover the rise in the average meal price is mainly due to a larger fraction of agents who simultaneously revise their price. We also find that during the changeover more market power (proxied by a index of concentration on local markets) was associated with larger price increases; we propose a simple interpretation based on consumer behavior which may also explain why the effects of the cash changeover were especially pronounced in this industry as opposed to more competitive ones.euro cash changeover; menu cost

Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms

The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases(the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications.monetary transmission, cost channel, working capital

Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms

The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases (the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications.monetary transmission, cost channel, working capital

Does monetary policy have asymmetric effects? A look at the investment decisions of Italian firms

This paper studies the effects of monetary policy on the investment behaviour of various categories of Italian firms, using a panel from the Company Accounts Data Service (Centrale dei Bilanci). The exercise aims to shed light on the quantitative importance of a channel of transmission operating through balance sheets. Financial variables matter (when defined as either cash flow or the stock of liquidity); small firms and firms which have a larger share of assets that cannot be used as collateral are more affected by monetary policy. In quantitative terms, the difference in the response of investment by different types of firms turns out not to be negligible; however, the implications of this finding for transmission asymmetries across euro-area countries should not be overemphasized. Our main policy conclusion is that monitoring the financial conditions of different types of firms is important in order to assess the overall monetary stance JEL Classification: E22, E50Investment, monetary transmission, user cost of capital

Does monetary policy have asymmetric effects? A look at the investment decisions of Italian firms

This paper studies the effects of monetary policy on the investment behaviour of various categories of Italian firms, using a panel from the Company Accounts Data Service (Centrale dei Bilanci). The exercise aims to shed light on the quantitative importance of a channel of transmission operating through balance sheets. Financial variables matter (when defined as either cash flow or the stock of liquidity); small firms and firms which have a larger share of assets that cannot be used as collateral are more affected by monetary policy. In quantitative terms, the difference in the response of investment by different types of firms turns out not to be negligible; however, the implications of this finding for transmission asymmetries across euro-area countries should not be overemphasized. Our main policy conclusion is that monitoring the financial conditions of different types of firms is important in order to assess the overall monetary stance.investment, monetary transmission, user cost of capital

Is money informative? Evidence form a large model used for policy analysis

In this paper we assess whether monetary variables, which are observed with little delay, conveyed marginal information on the state of the Italian economy in the 1990s, taking as a benchmark the forecasting errors generated by the quarterly model used by the Bank of Italy. We follow two approaches. First we map monetary surprises into estimates of the structural disturbances using a Kalman filter approach, in order to improve the forecasts. Then we look at the sample correlations among forecasting errors in monetary and real variables, thereby taking into account links that may not be accounted for by the modelÂ’s structure. We find that bank interest rates have a strong information content. Monetary aggregates play no role according to the first approach; according to the second approach they do, but the economic interpretation of this finding is not straightforward. All in all, the results highlight the role of financial prices and quantities as indicators of the state of the economy. However, they do not imply a mechanical policy reaction to this information, as both the strength and the sign of the relationship between the surprises in monetary and real variables depend on the source of the shocks.monetary aggregates, information variables, Kalman filtering, forecasting

Money demand in the euro area: do national differences matter?

This paper assesses the relevance of national information in estimating the demand for euro-area M3 from three perspectives. First, we check whether aggregating national money demands is appropriate. Second, we compare time-series and panel methods to estimate aggregate long-run coefficients. Finally, we investigate the differences among national money demands. We find that the hypothesis of perfect aggregation is not rejected. Nevertheless, some estimates of area-wide long-run parameters are sensitive to the method used to combine national information. We also find that the main difference among individual countriesÂ’ money demands is their interest elasticity, as well as the existence of country-specific structural breaks.money demand, aggregation, European Central Bank