The Taylor Rule and 'Opportunistic' Monetary Policy

We investigate the possibility that the Taylor rule should be formulated as a threshold process such that the Federal Reserve acts more aggressively in some circumstances than in others. It seems reasonable that the Federal Reserve would act more aggressively when inflation is high than when it is low. Similarly, it might be expected that the Federal Reserve responds more to a negative than a positive output gap. Although these specifications receive some empirical support, we find that a modified threshold model that is consistent with “opportunistic†monetary policy makes significant progress towards explaining Federal Reserve behavior.taylor rule; cointegration; structural break

Breaks, bubbles, booms, and busts: the evolution of primary commodity price fundamentals

This paper explores the behavior of real commodity prices over a 50–year period. Attention is given to how the fundamentals for various commodity prices have changed with a special emphasis on behavior since the mid 2000s. To identify changing commodity price fundamentals we estimate shifting–mean autoregressions by using: the Bai and Perron (1998) procedure for estimating structural breaks; a SlowShift procedure that specifies intercepts to be nonlinear, potentially smooth functions of time; and low frequency Fourier functions. We find that the pattern in the timing of the various shifts is suggestive of the causal fundamentals underlying the recent boom.Commodity Prices, Fundamentals, Nonlinear Trends, Shifting--Mean Autoregression

Inflation, Wealth And The Real Rate Of Interest

Mundell obtains this result by postulating stable flow demands for assets, whereas — as is argued here -- saving and investment arise from an inequality between actual and desired asset stocks. The model developed in this paper will include both the stock and flow demands for assets and demonstrates that inflation will permanently alter the real interest rate only if it can change the desired stock of capital

A General Equilibrium Model of Agricultural Trade: An Intertemporal Optimizing Approach with Implications for Tariffication

The paper develops a theoretical model such that the performance of the macroeconomy is consistent with optimizing the behavior of rational individuals. It demonstrates that, in principle, it is possible to convert existing trade barriers into tariffs by using the price-gap method. In practice, however, tariff and nontariff barriers are not equivalent; replacing policies that result in a price gap of x percent with a tariff of x percent will generally yield different trade volumes. U.S. farm exports will initially decline in anticipation of a reduction in foreign trade barriers. Current demand for U.S. agricultural exports is likely to decline as rational agents in the foreign agricultural sector reduce current storage and demand increase current production in anticipation of a decline in their domestic prices. U.S. export performance will improve once trade restrictions are actually reduced

Portfolio Balance and Balance of Payments Sterilization

Current interest in the monetary theory of the balance of payments has spurred interest in both the static and dynamic and effects of central bank sterilization policies.— In particular, the monetary approach to the balance of payments demonstrates that an improper rate of monetary expansion will lead to an official settlements deficit or surplus. As sterilization policies alter the rate of growth of the domestic money supply, it is important to determine how sterilization affects the balance of payments. The ongoing debate concerning the relative merits of fixed versus flexible exchange rates also serves to underline the importance of balance of payments sterilization. Proponents of flexible exchange rates argue that monetary independence cannot be attained under a pegged rate regime, whereas advocates of fixed rates claim that sterilization can lead to monetary independence even if the exchange rate is pegged

Macroeconomic Versus Market-Specific Protection: An Intertemporal Optimizing Model of North-South Trade

If the General Agreement on Trade and Tariffs reduces foreign trade barriers against U.S. farm exports, special interest groups in affected nations will seek other forms of protection. It would not be surprising if some of our trading partners used general macroeconomic policies to promote domestic production. This paper develops a model to demonstrate how the government of an importing nation might reasonably undertake macroeconomic policies designed to thwart imports. Using a two-country, overlapping generations model, the paper analyzes some of the tensions between developed and developing nations regarding intertemporal trade and capital movements. The model is designed so the optimizing agents in the South have a high rate of time preference. Otherwise, the North and the South are alike in all respects. The differential rate of time preference means that the South is likely to have a relatively low capital-to-labor ratio, wage rate, and level of per capita income but a relatively high interest rate in autarkic equilibrium. The introduction of international capital flows (intertemporal trade) will be welfare reducing for the current generation in the South, even though it may increase the next generation\u27s (and steady-state) utility. The international conflicts that arise from international capital movements and the intergenerational conflicts that arise within each nation are discussed

An Argument Against Monetary Independence in a Flexible Exchange Rate Regime

Proponents of flexible exchange rates have long claimed that one of the main advantages of a flexible exchange rate regime is that It allows a nation to pursue an Independent monetary policy. Under a system of fixed exchange rates, the actions of the domestic monetary authorities are limited by their ability to finance a balance of payments deficit. Whether a nation is small (in the sense that its monetary authorities cannot control the nominal money supply) or large (in the sense that its actions can affect the world money supply) fixed exchange rates prevent the domestic monetary authorities from continually expanding the domestic component of the money supply at a rate greater than the rate of growth of the demand for domestic money

Portfolio Balance And Exchange Rate Stability

Much of the ongoing debate concerning the relative advantages of a fixed vs. a flexible exchange rate regime has centered around the stabilizing or destabilizing effects of speculation and the magnitudes of the elasticities of demand for foreign goods and services (1), Using a small-country model which implicitly ignored portfolio balance effects, Mundell (1960) added another dimension to the controversy by demonstrating that the stability properties of either type of exchange rate system depend upon the degree of capital mobility. In particu lar, Mundell shows that when capital is perfectly mobile internationally, a fixed exchange rate ensures a direct approach towards equilibrium while a flexible rate can produce a cyclical approach. In contrast, if capital is immobile, a flexible exchange rate ensures a direct approach towards equilibrium while a fixed rate makes a cyclical approach likely

Unit Roots and the Real Exchange Rate Before World War I: The Case of Britain and the U.S.

The popularity of the Monetary Approach to the Balance of Payments and the Exchange Rate brought renewed interest in Purchasing Power Parity (PPP). The essence of the Monetary Approach as advocated by Johnson (1976) and Frenkel (1978) was to combine a simple theory of the demand for money with the Purchasing Power Parity relationship in order to \u27explain\u27 movements in a nation\u27s Official Settlements Balance or exchange rate. Lately, the Monetary Approach has come under attack because of large and persistent measured devia tions from PPP, Daniel (1986) and Dornbusch (1980) view these deviations as symptomatic of \u27sticky\u27 commodity prices; if commodity prices are sticky, changes in the nominal exchange rate will induce changes in the real exchange rate arid in deviations from PPP. Others attempt to explain the observed deviations within the context of a flexible-price framework; productivity changes, as in Stockman (1987), or delivery lags, as in Magee (1978), can give rise to optimal movements in a nation\u27s real exchange rate. In spite of these different views, there is a wide support for the following synthesis of Mussa\u27s (1979) \u27stylized facts\u27

Testing for Time Dependence in Parameters

This paper proposes a new test based on a Fourier series expansion to approximate the unknown functional form of a nonlinear time-series model. The test specifically allows for structural breaks, seasonal parameters and time-varying parameters. The test is shown to have evry good size and power properties. However, it is not especially good in detecting nonlinearity in variables. As such, the test can help determine whether an observed rejection of the joint null hypothesis of linearity and time invariant parameters is due to time-varying coefficients of a nonliearity in variables.time varying parameters; fourier-series; nuisance parameters