Monetary Policy under Adaptive Learning

The paper studies the conduct of monetary policy, in a simple new Keynesian model, with adaptive learning on the part of the private sector. A key feature is that even though we start out with a linear “structural†model, the system and hence policy responses inherit the non-linear feature of the updating equations for the estimated parameters. In the paper, we contrast two different monetary policy regimes. In the first the central bank follows a simple rule, which comes from the first order conditions, for optimal policy under discretion in the case of rational expectations. In the second, the central bank has full information about the structure of the economy, including the adaptive learning mechanism. It takes the expectations formation mechanism explicitly into account when deriving optimal policy. This framework allows an explicit discussion of the importance of keeping inflation expectations under control. We illustrate with an application to a regime change, where we assume that the incumbent policymaker did not take the learning into account and allowed the expectation formation process to become unhinged. However, before inflation expectations (and actual inflation) spirals out of control, we assume that a sophisticated central banker, who does take the effect of learning into account, takes charge and study how the economy adjusts after the regime change. Under our assumptions the transition is slow. We claim that some features of the transition match important stylised facts associated with the Volcker disinflation in the US. In the end the fully optimal policy delivers less inflation and output gap volatility. It does so by anchoring inflation expectations thereby contributing to the overall stability of the economy. To achieve this result optimal policy is conditional on the degree of perceived persistence. As perceived persistence increases so does inertia in the policy response in the face of inflation shocks. We compare the contrast between the two policy regimes in the paper with the difference between the rational expectations under discretion and commitment.monetary policy, adaptive learning, regime change

Macroeconomic Adjustment to Monetary Union

The move to monetary union in Europe led to convergence of interest rates among the participating countries. This was associated with notable cross-country differences in the behaviour of key macroeconomic aggregates. Compared to the low interest rate countries, former high interest rate countries experienced a boom in domestic demand, a deterioration of the current account and appreciation of the real exchange rate. This paper documents the key stylised facts of this experience and provides a compact two-country model, based on the Blanchard-Yaari setup, to analyze this phenomenon. This model, though simple, is able to broadly capture the main qualitative features of the adjustment. Using this model, we show that the creation of the monetary union leads to an increase in welfare for all generations in both country groups.euro area, interest rate convergence, overlapping generations model.

Stability First: Reflections Inspired by Otmar Issing's Success as the ECB's Chief Economist

In this paper, we review Otmar Issing's career as the ECB's inaugural chief economist and we document many notable successes. We try to infer some general principles that contributed to these successes and draw some lessons. In doing so, we review the evidence using Woodford%u2019s (2003) recent revival of the Wicksellian approach to monetary policy making. Suitably interpreted the baseline model can rationalize Issing%u2019s three guiding principles for successful policymaking. This baseline model, however, fails to account for the important role that monetary and financial analysis played in the conduct of policy during Issing%u2019s tenure. We propose an extension of the model to account for financial developments and show that this extended model substantially improves our understanding of ECB practice. We conclude by listing six open questions, relevant for the future of central banking in Europe that Issing may want to consider in case leisure allows.

Optimal Monetary Policy under Adaptive Learning

We consider optimal policy when private sector expectations are formed through adaptive learning. Earlier research has found that adaptive learning is consistent with empirical evidence on private sector expectations. In this paper, we consider the (admittedly) extreme case of sophisticated central banking, whereby the central bank has full knowledge about the structure of the economy. Our results confirm that the management of inflation expectations is crucial for the conduct of monetary policy. n particular, when the private sector perceives that inflation persistence is high, optimal policy responds strongly to lagged inflation and inflation shocks thereby stabilizing inflation and anchoring inflation expectations. For our parametrization it does so at no cost for output gap stabilityOptimal Policy, Adaptive Learning, Rational Expectations, Policy Rules

Interest Rate Determination in the Interbank Market

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.Overnight interest rate; Monetary policy instruments; Eonia panel

Relativistically into finance

The change of information near the light speed, advances in high-speed trading, spatial arbitrage strategies and foreseen space exploration, suggest the need to consider the effects of the theory of relativity into finance models. Time and space, under certain circumstances, are not dissociated and no longer can be interpreted as Euclidean. This paper provides an overview of research made on this field, while formally defining the key notions of spacetime and proper time. Further progression in this field does require a common ground of concepts and an understanding of how time dilation impacts financial models. For illustration purposes, we compute relativistic effects for option prices when viewed from the viewpoint of two distinct reference frames, based upon the classical Balck-Scholes model. We show relativistic effects are non-negligible and illustrate how they depend on option characteristics such as maturity of the contract and volatility of the underlying.info:eu-repo/semantics/publishedVersio

Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods

During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time.

Inbound learning: revolutionizing educational paradigms

This paper explores the transformative potential of Inbound Learning in educational settings, integrating principles from inbound marketing to foster personalized, engaging, and effective learning experiences. Through a comprehensive literature review, the study examines the application of Inbound Learning strategies across diverse educational levels and contexts, highlighting significant improvements in student engagement, academic performance, and educator satisfaction. The methodology employed combines quantitative and qualitative approaches to assess the impact of these strategies, revealing a positive correlation between personalized educational content and improved learning outcomes. Challenges such as technological access, resource allocation, and teacher training are discussed, alongside future perspectives that suggest the integration of advanced educational technologies and policy support to overcome these barriers. The findings underscore the efficacy of Inbound Learning in meeting the contemporary needs of learners and educators, advocating for its broader adoption to revolutionize educational practices

Home Bias in Portfolios and Taxation of Asset Income

Intuitively, the observed 'home bias' in individual portfolios plausibly explains the international capital immobility in aggregate data reported by Feldstein and Horioka (1980) as well as the survival of taxes on capital income. These intuitions are examined explicitly in a model where random consumer prices cause individuals to invest heavily in domestic equity as a hedge against these price fluctuations. Neither intuition is fully supported by the model. While the model forecasts that extra domestic savings generate extra investment primarily in the home country, consistent with the evidence in Feldstein and Horioka, this is true regardless of whether consumer price are random and so whether portfolios have 'home bias.' In addition, while random equity returns facilitate taxes on equity income, as shown in Gordon and Varian (1989) and Huizinga and Nielsen (1997), random consumer prices appear to undermine taxes on capital income.

Prototype to Increase Crosswalk Safety by Integrating Computer Vision with ITS-G5 Technologies

Human errors are probably the main cause of car accidents, and this type of vehicle is one of the most dangerous forms of transport for people. The danger comes from the fact that on public roads there are simultaneously different types of actors (drivers, pedestrians or cyclists) and many objects that change their position over time, making difficult to predict their immediate movements. The intelligent transport system (ITS-G5) standard specifies the European communication technologies and protocols to assist public road users, providing them with relevant information. The scientific community is developing ITS-G5 applications for various purposes, among which is the increasing of pedestrian safety. This paper describes the developed work to implement an ITS-G5 prototype that aims at the increasing of pedestrian and driver safety in the vicinity of a pedestrian crosswalk by sending ITS-G5 decentralized environmental notification messages (DENM) to the vehicles. These messages are analyzed, and if they are relevant, they are presented to the driver through a car’s onboard infotainment system. This alert allows the driver to take safety precautions to prevent accidents. The implemented prototype was tested in a controlled environment pedestrian crosswalk. The results showed the capacity of the prototype for detecting pedestrians, suitable message sending, the reception and processing on a vehicle onboard unit (OBU) module and its presentation on the car onboard infotainment system.info:eu-repo/semantics/publishedVersio