The Nonlinear Phillips Curve and Inflation Forecast Targeting - Symmetric Versus Asymmetric Monetary Policy Rules

We extend the Svensson (1997a) inflation forecast targeting framework with a convex Phillips curve. We derive an asymmetric target rule, that implies a higher level of nominal interest rates than the Svensson (1997a) forward looking version of the reaction function popularised by Taylor (1993). Extending the analysis with uncertainty about the output gap, we find that uncertainty induces a further upward bias in nominal interest rates. Thus, the implications of uncertainty for optimal policy are the opposite of standard multiplier uncertainty analysis.inflation targets;nonlinearities;asymmetries;stochastic control

Capital Controls, Two-tiered Exchange Rate Systems and the Exchange Rate Policy: The South African Experience

South Africa's 40 years of experience with capital controls on residents and non-residents (1961-2001) reads like a collection of examples of perverse unanticipated effects of legislation and regulation.We show that the presence of capital controls on residents and non-residents, enabled the South African Reserve Bank (SARB) to target domestic interest rates (and or the exchange rate) via interventions in the (commercial) foreign exchange market.This provides an early rationale for anchoring SA monetary policy via the exchange rate, rather than via domestic interest rates.This suggests not only that the capital controls themselves exhibited substantial institutional inertia, but that this same institutional inertia also applied to the monetary policy regime.A plausible reason for this is that for most of the 20th century in South Africa (partial) capital controls and exchange rate based monetary policies were like Siamese twins; almost impossible to separate.capital controls;exchange rate mechanism

On the economic independence of the central bank and the persistence of inflation (Second revision)

Inflation;Central Banks;Monetary Policy;Models

Learning, Inflation Reduction and Optimal Monetary Policy

In this paper we analyze disinflation in two environments.One in which the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector inflation expectations are generated, and one in which the central bank has to learn the private sector inflation forecasting rule.Here, the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.With imperfect knowledge, results depend on the learning scheme that is employed.A novel feature of the passive learning policy - compared to the central bank s disinflation policy under perfect knowledge - is that the degree of monetary accommodation (the extent to which the central bank accommodates private sector inflation expectations) is no longer constant across the disinflation, but becomes state-dependent.This means that the central bank's behaviour changes during the disinflation as it collects more information.inflation;monetary policy;learning;rational expectations;optimal control

European central bank independence and inflation persistence

Central Banks;EEC;monetary economics

Central bank independence: Theory and evidence (Revised version)

Game Theory;Central Banks

The ultimate determinants of central bank independence

Using a graphical method, a new way of determining the optimal degree of central bank conservativeness is developed in this paper. Unlike Lohmann (1992) and Rogoff (1985), we are able to express the upper and lower bounds of the interval containing the optimal degree of conservativeness in terms of the structural parameters of the model. Next, we show that optimal central bank independence is higher, the higher the natural rate of unemployment, the greater the benefits of unanticipated inflation, the less inflation-averse society, and the smaller the variance of productivity shocks. These propositions are tested for nineteen industrial countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, New Zealand, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States) for the post-Bretton-Woods period (1960-1993). In testing the model we employ a latent variables method (LISREL) in order to distinguish between actual and optimal monetary regimes.Central Banks;Monetary Policy;monetary economics

New Economy - New Policy Rules?

The U.S. economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so. We wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies. Accordingly, we begin with a standard economy in which a version of the Taylor rule constitutes the optimal monetary policy for a given inflation target and a given level of productivity. We augment this model with regime switching in productivity, and calculate the optimal monetary policy rule in the altered environment. We find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor rule. We use this result to comment on the "new economy" events of the 1990s and the "stagflation" events of the 1970s from the perspective of our model.inflation targets;strutural change;monetary policy rules;new economy;regime switching

The effects of inflation on growth and fluctuations in dynamic macroeconomic models

Economic Growth;Macroeconomic Models;Inflation;Monetary Models

Monetary Policy, Determinancy and Learnability in the Open Economy

We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework.The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone.We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation.We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. Keywords: Indeterminacy, learning, monetary policy rules, new open economy macroeconomics, exchange rate regimes, second generation policy coordination.learning;monetairy policy;open economy;macroeconomics;exchange rate;indeterminacy;second generation policy coordination