Cost-Push Shocks and Monetary Policy and Monetary Policy

This paper analyses the implications of cost-push shocks for the optimal choice of monetary policy target in an two-country sticky-price model. In addition to cost-push shocks, each country is subject to labour-supply and money-demand shocks. It is shown that the fully optimal coordinated policy can be supported by independent national monetary authorities following a policy of flexible inflation targeting. A number of simple (but non-optimal) targeting rules are compared. Strict producer-price targeting is found to be the best simple rule when the variance of cost-push shocks is small. Strict consumerprice targeting is best for intermediate levels of the variance of cost-push shocks. And nominal-income targeting is best when the variance of cost-push shocks in high. In general, money-supply targeting and fixed nominal exchange rates are found to yield less welfare than these other regimes. -- Dieses Papier analysiert die Implikationen eines Cost-Push-Schocks für die optimale Wahl eines Zieles für die Geldpolitik in einem 2-Länder-Modell mit träger Preisanpassung. Neben einem Cost-Push-Schock erlebt jedes Land auch Arbeitsangebots- und Geldnachfrageschocks. Man kann sagen, dass die optimale koordinierte Politik durch unabhängige nationale Zentralbanken verwirklicht werden kann, die eine Strategie des flexiblen Inflation Targeting verfolgen. Eine Reihe einfacher (aber nicht optimaler) geldpolitischer Regeln wird verglichen. Eine Politik, bei der Ziele für die Produzentenpreise angestrebt werden, erweist sich als die beste einfache Regel, wenn die Varianz der Cost-Push-Schocks klein ist. Ziele für Konsumentenpreise sind am besten geeignet bei Cost-Push-Schocks mittlerer Stärke. Ziele für das Nominaleinkommen sind vorzuziehen, wenn die Varianz der Cost-Push-Schocks hoch ist. Im Allgemeinen sind in dem Modell Geldmengenziele oder eine Politik fester Wechselkurse wohlfahrtsökonomisch diesen genannten Regimen unterlegen.monetary policy,inflation targeting,welfare

The Expenditure Switching Effect, Welfare and Monetary Policy in a Small Open Economy

This paper analyses the implications of the 'expenditure switching effect' for the role of the exchange rate in monetary policy in a small open economy. It is shown that, when elasticity of substitution between home and foreign goods is not equal to unity, welfare depends on the variances of producer prices and the terms of trade. Producer-price targeting is compared to consumer-price targeting and a fixed exchange rate. It is found that a fixed exchange rate yields higher welfare than the other regimes only when the elasticity of substitution between home and foreign goods is a very high. ownership.monetary policy, exchange rates, welfare

PortisHEad: portfolios in successful Higher Education admissions

The PortisHEad project developed tools to support applications to UK higher education through learner-owned e-portfolios; including the ability to target unique e-portfolios to different institutions. The original demonstration tool helped address the recommendations of the Schwartz report for fairer admissions to higher education. However, despite good learner feedback and a strong sectoral imperative, the tool was not implemented by UCAS, the application service. Despite the withdrawal of UCAS from the project the remaining partners developed a generic application toolkit which allows any e-portfolio user to auto-complete educational or employment-related ‘application-type’ forms using learner-owned data from their e-portfolio. The toolkit is consistent with the ‘thin e-portfolio model’ propounded by the JISC-funded e-Portfolio Reference Model project. It uses an ‘open standard’ web-service which is easily implementable by ‘form-owners’; access to data is managed by the learners and remains secure. The toolkit is easy to deploy and has already generated significant interest not only from admissions tutors but also for its utility to teachers and staff developers. This paper points to how learner-controlled technologies, and learner-owned data, can be meaningfully utilized to engage with intra- and extra-institutional systems using open standards and web services. It also illustrates that technological difficulties are less critical than organisational ones

The timing of asset trade and optimal policy in dynamic open economies

Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national policymaker can choose a policy rule which reduces the work effort of households in the policymaker’s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policymaker’s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.PostprintPeer reviewe

Computing Second-Order-Accurate Solutions for Rational Expectation Models Using Linear Solution Methods

This paper shows how to compute a second-order accurate solution of a non-linear rational expectation model using algorithms developed for the solution of linear rational expectation models. This result is a state-space representation for the realized values of the variables of the model. This state-space representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts.Second-order approximation; solution method for rational expectation models.

Can Endogenous Changes in Price Flexibility Alter the Relative Welfare Performance of Exchange Rate Regimes?

A dynamic general equilibrium model of a small open economy is presented where agents may choose the frequency of price changes. A fixed exchange rate is compared to inflation targeting and money targeting. A fixed rate generates more price flexibility than the other regimes when the expenditure switching effect is relatively weak, while money targeting generates more flexibility when the expenditure switching effect is strong. These endogenous changes in price flexibility can lead to changes in the welfare performance of regimes. But, for the model calibration considered here, the extra price flexibility generated by a peg does not compensate for the loss of monetary independence. Inflation targeting yields the highest welfare level despite generating the least price flexibility of the three regimes considered.

Computing second-order-accurate solutions for rational expectation models using linear solution methods

This paper shows how to compute a second-order accurate solution of a non-linear rational expectation model using algorithms developed for the solution of linear rational expectation models. The result is a state-space representation for the realized values of the variables of the model. This state-space representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts. JEL Classification: C63, E0Second order approximation, Solution method for rational expectation models

Policy instrument choice and non-coordinated monetary in interdependent economies

Non-coordinated monetary policy is analysed in a stochastic two-country general equilibrium model. Non-coordinated equilibria are compared in two cases: one where policy is set in terms of state-contingent money supply rules and one where policy is set in terms of state-contingent nominal interest rate rules. In general the non-coordinated equilibrium differs between the two types of policy rule but a number of special cases are identified where the equilibria are identical. The endogenous choice of policy instrument is analysed and the Nash equilibrium in the choice of policy instrument is shown to depend on the interest elasticity of money demand. --Monetary policy,money supply rules,interest rate rules

Endogenous Price Flexibility and Optimal Monetary Policy

Much of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endo?genising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push distur?bances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfare-relevant output gap.Welfare, Endogenous Price Flexibility, Optimal Monetary Policy.