Inertial Taylor rules: the benefit of signaling future policy

We trace the consequences of an energy shock on the economy under two different monetary policy rules: a standard Taylor rule where the Fed responds to inflation and the output gap; and a Taylor rule with inertia where the Fed moves slowly to the rate predicted by the standard rule. We show that with both sticky wages and sticky prices, the outcome of an inertial Taylor rule is superior to that of the standard rule, in the sense that inflation is lower and output is higher following an adverse energy shock. However, if prices alone are sticky, things are less clear and the standard rule delivers substantially less inflation than the inertial rule in the short run.Monetary policy ; Interest rates ; Inflation (Finance)

Monetary shocks, agency costs, and business cycles

This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real-business-cycle model modified to include endogenous agency costs. The paper’s chief contribution is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?Business cycles ; Monetary policy

Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis

An analysis of the quantitative effects of agency costs in a real business cycle model, showing that these costs can explain why output growth displays positive autocorrelation at short horizons.Business cycles ; Investments

Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets

This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.Monetary policy ; Inflation (Finance)

Central bank independence and inflation: a note

We document increased central bank independence within the set of industrialized nations. This increased independence can account for nearly two thirds of the improved inflation performance of these nations over the last two decades.Banks and banking, Central ; Inflation (Finance)

Money growth rules and price level determinacy

The authors show that in a plausibly calibrated monetary model with explicit production, exogenous money growth rules ensure real determinacy and thus avoid sunspot fluctuations. Although it is theoretically possible to construct examples in which real indeterminacy does arise, these examples rely on implausible money-demand elasticities or ignore the effect of production on the model’s dynamics.Demand for money ; Monetary policy

Central bank independence: the key to price stability?

Low inflation over long periods is the sign of an effective central bank. The authors suggest that a large fraction of the worldwide decline in inflation since the early 1980s results from an international movement toward more independent central banks.Banks and banking, Central ; Inflation (Finance)

Investment and interest rate policy: a discrete time analysis

This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.Interest rates ; Monetary policy ; Banks and banking, Central

The fiscal theory of the price level

A traditional function of the central bank is to control the price level. The fiscal theory of the price level challenges this assumption, arguing instead that the fiscal authority's budgetary policy is the primary determinant of the price level. The authors provide a critical review of the fiscal theory and its implications for monetary policy.Banks and banking, Central ; Fiscal policy ; Monetary policy

Asset prices, nominal rigidities, and monetary policy

Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.Monetary policy ; Banks and banking, Central