Does Anticipated Aggregate Demand Policy Matter? Further Econometric results.

A heated debate has arisen over what Modigliani has dubbed the Macro Rational Expections (MRE) hypothesis. This hypothesis embodies two component hypotheses: 1) rational expectations and 2) short-run neutrality -- i.e., that anticipated changes in aggregate demand will have already been taken into account in economic agents' behavior and will thus evoke no output or employment response. Together these component hypotheses imply that deterministic feedback policy rules will have no effect on business cycle fluctuations. The irrelevance of these types of policy rules is inconsistent with much previous macro theorizing as well as with the views of policymakers. It is thus an extremely controversial proposition which requires a wide range of empirical research. This paper is a sequel to a previous paper by the author. That paper developed a methodology for testing the MRE hypothesis and found that anticipated money growth does matter to the business cycle. This paper extends the analyses to cases where the rate of nominal GNP growth or the inflation rate, rather than money growth, is the aggregate demand variable. The empirical results are also negative on the MRE hypothesis and its corresponding policy ineffectiveness proposition.

Financial stability and the Macroeconomy

This paper surveys the causes and macroeconomic consequences of financial instability. It emphasizes the key role of asymmetric information in causing financial instability and explores several recent instances of financial crises in industrial and emerging market countries. The paper then discusses the appropriate macroeconomic policies to reduce the risk of financial instability and to promote recovery from financial crises, if they have occurred. It argues that Central Banks should be just as concerned with financial stability as with price stability. It emphasizes that financial stability is by no means incompatible with the goal of price stability. In fact, price stability can promote financial stability since it leads to longer duration debt contracts and a sounder currency.

Does inflation targeting matter? - commentary

Inflation (Finance) ; Monetary policy

Can Futures Market Data Be Used to Understand the Behavior of Real Interest Rates?

Understanding the behavior of real interest rates is a central issue in monetary/macro economics. Recently researchers have begun to use futures market data to examine real interest rate behavior. Futures market data can be used to directly construct own-commodity real interest rates ? i.e., the ex-ante real return on a bond in terms of specific commodities -- and then the own-commodity real rates can be used to make inferences about the real interest rate for the aggregate economy, This paper examines whether futures market data can be used to understand the behavior of real interest rates. The conclusion is a negative one: Futures market data do not appear to be particularly informative about real interest rates. In coming to this conclusion, the paper examines the data in several ways. First. the ex-ante relative price movement embedded in the own-commodity real rates (the noise) is calculated to be on the order of over one hundred times more variable than the aggregate real interest rate (the signal), Own-commodity real rates are thus unlikely to contain much information about the aggregate real interest rate. Second. several widely accepted facts about the behavior of aggregate real interest rates in the 1960s are not at all evident in the own-commodity real rate data. Thus, analysis of own- commodity real rates provides a misleading impression of aggregate real rate movements for a period which displays the most striking movements of real interest rates in the postwar period. Finally, an econometric analysis of own-commodity real rate behavior fails to find evidence of a shift in the behavior of real interest rates when the monetary policy regime changes in October 1579, a finding that is at odds with previous strong findings in the literature.

International Experiences With Different Monetary Policy Regimes

In recent years a growing consensus has emerged for price stability as the overriding, long run goal of monetary policy. However, despite this consensus, the following question still remains: how should monetary policy be conducted to achieve the price stability goal? This paper examines the experience with different monetary policy regimes currently in use in a number of countries to shed light on this question.inflation targeting; monetary policy;

U.S. Macroeconomic Policy and Performance in the 1980s: An Overview

This piper provides an overview of U.S. macroeconomic policy and performance in the 1980s by first outlining the behavior of key economic variables and then discussing the policies that have affected these variables. After gaining some insight into the interaction between these policies and macroeconomic performance, it then goes on to examine where macro policy and the U.S. economy may be heading in the next several years.