Linear-Quadratic Approximation, Efficiency and Target-Implementability

We examine linear-quadratic (LQ) approximation of stochastic dynamic optimization problems in macroeconomics (and elsewhere), in particular in policy analysis using Dynamic Stochastic General Equilibrium (DSGE) models. We first define the problem that is solved by a social planner, given that the objective of the latter is to maximize average welfare; this yields the efficient solution. We then comment on the LQ approximation when a tax or subsidy can be imposed such that the zero-inflation competitive steady state output level is equal to the efficient level. We then examine the correct procedure for replacing a stochastic non-linear dynamic optimization problem with a linear-quadratic approximation. We show that a procedure proposed by Benigno and Woodford (2004) for large underlying distortions in the economy can be more easily implemented through a second-order approximation of the Hamiltonian used to compute the ex ante optimal policy with commitment (the Ramsey problem). We then define the notion of Target-Implementability, which is also a sufficient condition for a particular steady-state maximum of the Ramsey problem, and explain the usefulness of this in the context of stabilization policyLinear-quadratic approximation, dynamic stochastic general equilibrium models, utility-based loss function

Monetary Policy Coordination Revisited in a Two-Bloc DSGE Model

We reassess the gains from monetary policy coordination within the confines of the canonical NOEM in the light of three issues. First, the literature uses a number of cooperative and non-cooperative equilibrium concepts that do not always clearly distinguish commitment and discretionary outcomes, and in some cases adopts inappropriate concepts. Second, our analysis is welfare based. Moreover, as with much of this literature, we adopt a linear-quadratic approximation of the actual non-linear non-quadratic stochastic optimization problem facing the monetary policymakers. Our second objective then is to re-assess welfare gains using an accurate approximation for such a problem, a feature that for the most part is lacking in previous studies. Finally, we examine the issue where the monetary authority is restricted to rules that are operational in two senses: first, the zero lower bound constraint is imposed on the optimal rule and second, we study simple Taylor-type commitment rules that unlike fully optimal rules are easily monitored by the public.monetary rules, open economy, coordination games, commitment, discretion, zero bound constraint

Linear-quadratic approximation, external habit and targeting rules

We examine the linear-quadratic (LQ) approximation of non-linear stochastic dynamic optimization problems in macroeconomics, in particular for monetary policy. We make four main contributions: first, we draw attention to a general Hamiltonian framework for LQ approximation due to Magill (1977). We show that the procedure for the ‘large distortions’ case of Benigno and Woodford (2003, 2005) is equivalent to the Hamiltonian approach, but the latter is far easier to implement. Second, we apply the Hamiltonian approach to a Dynamic Stochastic General Equilibrium model with external habit in consumption. Third, we introduce the concept of target-implementability which fits in with the general notion of targeting rules proposed by Svensson (2003, 2005). We derive sufficient conditions for the LQ approximation to have this property in the vicinity of a zero-inflation steady state. Finally, we extend the Hamiltonian approach to a non-cooperative equilibrium in a two-country model. JEL Classification: E52, E37, E58dynamic stochastic general equilibrium models, Linear-quadratic approximation, utility-based loss function

Growth and Welfare Effects of East-West European Migration

Using a calibrated two-bloc endogenous growth model of the European economy, we assess the growth and welfare impact of East-West European migration of different skill compositions. The East has a lower total factor productivity and a lower endowment of skilled labour. Migration can induce two growth-enhancing effects: an efficiency effect from the more e±cient use of labour in the West and a sectoral reallocation effect from a fall in the Western skilled-unskilled wage rates. Despite growth gains there are both winners (migrants, the representative Western non-migrant household) and losers (the representative Eastern household remaining). Remittances can see the latter group joining the winners.migration, endogenous growth, welfare, immigration surplus, emigration

Risk Management in Action. Robust monetary policy rules under structured uncertainty.

Recent interest in ‘Risk Management’ has highlighted the relevance of Bayesian analysis for robust monetary- policy making. This paper sets out a comprehensive methodology for designing policy rules inspired by such considerations. We design rules that are robust with respect to model uncertainty facing both the policy-maker and private sector. We apply our methodology to three simple interest-rate rules: inflation-forecast- based (IFB) rules with a discrete forward horizon, one targeting a discounted sum of forward inflation, and a current wage inflation rule. We use an estimated DSGE model of the euro area and estimated measures of structured exogenous and parameter uncertainty for the exercise. We find that IFB rules with a long horizon perform poorly with or without robust design. Our discounted future targeting rule performs much better, indicating that policy can be highly forward-looking without compromising stabilization. The wage inflation rule dominates whether it is designed to have good robust properties or not. JEL Classification: E52, E37, E58Interest-rate rules, Robustness, structured uncertainty

New Media, New Influencers and Implications for Public Relations

Marketers and public relations professionals today are confronted with an astounding array of new communications channels. Internet-based social media tools like blogs, podcasts, online video and social networks are giving voice to the opinions of millions of consumers. While mainstream media continues to play a vital role in the dissemination of information, even these traditional channels are increasingly being influenced by online conversations. The "new influencers" are beginning to tear at the fabric of marketing as it has existed for 100 years, giving rise to a new style of marketing that is characterized by conversation and community. Marketers are responding to these forces with a mixture of excitement, fear and fascination. They're alarmed at the prospect of ceding control of their messages to a community of unknowns. Yet at the same time they're excited about the prospect of leveraging theese same tools to speak directly to their constituents without the involvement of media intermediaries.The Society for New Communications Research set out to conduct an examination of how influence patterns are changing and how communications professionals are addressing those changes by adopting social media. The goals were to discover how organizations:Define new influencers;Communicate and create relationships with them;Use social media to create influence; andMeasure the effects of these efforts.Another goal of the study was to use these discoveries to offer a set of recommendations to professional communicators