Credit Market Distortions, Asset Prices and Monetary Policy

In this paper we develop a sticky price DSGE model to study the role of capital market imperfections for monetary policy implementation. Recent empirical and theoretical studies have stressed the effect of firms’ external finance on their pricing decisions. The so-called cost channel of the transmission mechanism has been explored within New Keynesian frameworks that pose particular emphasis on inflation dynamics. These models generally disregard the role of external …nance for the dynamics of asset prices. We ask whether monetary policy should respond to deviations of asset prices from their frictionless level and, more importantly, if the answer to this question changes when financial frictions are properly taken into account. We analyze these issues from the vantage of equilibrium determinacy and stability under adaptive learning. We show that usual conditions for equilibrium uniqueness and E-stability are significantly altered when the cost channel matters. Nevertheless, we find that responding to actual or expected asset price misalignments helps at restoring determinacy and stability under learning. These conclusions are further enforced in the presence of a high degree of pass-through from policy to bank lending rates

Credit Market Distortions, Asset Prices and Monetary Policy

Abstract: We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects heavily constrain the policy rate response to inflation from above, so that inflation tar- geting policies may not be capable of ensuring REE uniqueness. In such cases, it is advisable to combine inflation responses with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and avoids expectations of higher inflation to become self-fulfilling.Monetary Policy;Cost Channel;Asset Prices;Determinacy;E-stability

Reference-dependent Preferences and the Transmission of Monetary Policy

This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger e¤ects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically different across different cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households' utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing effects on the responses of output and inflation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-off between inflation and output stabilization that naturally arises in this context. Greater elasticity of inflation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of inflation under discretion, compared to what is otherwise prescribed during contractions.Reference-dependent Preferences;Asymmetry;Monetary policy.

Quantum annealing of the Traveling Salesman Problem

We propose a path-integral Monte Carlo quantum annealing scheme for the symmetric Traveling Salesman Problem, based on a highly constrained Ising-like representation, and we compare its performance against standard thermal Simulated Annealing. The Monte Carlo moves implemented are standard, and consist in restructuring a tour by exchanging two links (2-opt moves). The quantum annealing scheme, even with a drastically simple form of kinetic energy, appears definitely superior to the classical one, when tested on a 1002 city instance of the standard TSPLIB.Comment: 5 pages, 2 figure

"Credit Cycle" in an OLG Economy with Money and Bequest

In the late '90s Kiyotaki and Moore (KM) put forward a new framework (Kiyotaki and Moore,1997) to explore the Financial Accelerator hypothesis. The original model was framed in an Infinitely Lived Agent context (ILA-KM economy). As in KM we develop a dynamic model in which the durable asset ("land") is not only an input but also collateralizable wealth to secure lenders from the risk of borrowers' default. In this paper, however, we model an OLG-KM economy whose novel feature is the role of money as a store of value and of bequest as a vehicle of resources to be "invested" in landholding. The dynamics generated by the model are complex. Not only cyclical patterns are routinely generated but the periodicity and amplitude are irregular. A route to chaotic dynamics is open.

Faster annealing schedules for quantum annealing

New annealing schedules for quantum annealing are proposed based on the adiabatic theorem. These schedules exhibit faster decrease of the excitation probability than a linear schedule. To derive this conclusion, the asymptotic form of the excitation probability for quantum annealing is explicitly obtained in the limit of long annealing time. Its first-order term, which is inversely proportional to the square of the annealing time, is shown to be determined only by the information at the initial and final times. Our annealing schedules make it possible to drop this term, thus leading to a higher order (smaller) excitation probability. We verify these results by solving numerically the time-dependent Schrodinger equation for small size systemsComment: 10 pages, 5 figures, minor correction

Consumer Attitudes and the Epidemiology of Inflation Expectations

This paper studies the formation of consumers’ infl‡ation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of infl‡ation expectations like gender, income or education also other characteristics like the household’s fi…nancial situation and its purchasing attitudes matter. Respondents with current or expected …financial difficulties, with pessimistic attitudes about major purchases, or who expect income to go down in the future have considerably higher forecast errors, are further away from professional forecasts and have a stronger updward bias in their expectations than other households. However, their bias shrinks by more than the one of the average household in response to increasing media reporting about in‡flation