Identification and the liquidity effect: a case study

This article reviews some of the issues economists confront in attempting to compile facts about how monetary policy actions affect the economy.Monetary policy - United States ; Liquidity (Economics) ; Monetary policy

Resolving the liquidity effect: commentary

Liquidity (Economics)

Understanding Japan's saving rate: the reconstruction hypothesis

This paper evaluates Hayashi's conjecture that Japan's postwar saving experience can be accounted for by the neoclassical model of economic growth as that country's efforts to reconstruct its capital stock that was severely damaged in World War II. I call this the reconstruction hypothesis. I take a simplified version of a standard neoclassical growth model that is in widespread use in macroeconomics and simulate its response to capital destruction. The saving rate path implied by the model differs significantly from the path taken by actual Japanese postwar saving data. I discuss several model modifications which would reconcile the reconstruction hypothesis with Japan's postwar saving experience. For the reconstruction hypothesis to be credible requires independent evidence on the empirical plausibility of the model modifications. It is left to future research to determine whether that evidence exists.Saving and investment ; Japan

Searching For a Break in GNP

It has been suggested that existing estimates of the long-run impact of a surprise move in income may have a substantial upward bias due to the presence of a trend break in post war U.S. GNP data. This paper shows that the statistical evidence does not warrant abandoning the no trend null hypothesis. A key part of the argument is that conventionally computed significance levels overstate the likelihood of the trend break alternative hypothesis. This is because they do not take into account that, in practice, the break date is chosen based on pre-test examination of the data.

Money and the U.S. economy in the 1980s: a break from the past?

Money supply ; Velocity of money

Government Policy, Credit Markets and Economic Activity

The US government has recently conducted large scale purchases of assets and implemented policies that reduced the cost of funds to financial institutions. Arguably these policies have helped to correct credit market dysfunctions, allowing interest rate spreads to shrink and output to begin a recovery. We study four models of financial frictions which explore different channels by which these effects might have occured. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. We use two of our models to consider the welfare and other effects of these policies.

Money Growth Monitoring and the Taylor Rule

Using a series of examples, we review the various ways in which a monetary policy characterized by the Taylor rule can inject volatility into the economy. In the examples, a particular modification to the Taylor rule can reduce or even entirely eliminate the problems. Under the modified policy, the central bank monitors the money growth rate and commits to abandoning the Taylor rule in favor of a money growth rule in case money growth passes outside a particular monitoring range.

The expectations trap hypothesis

This article explores a hypothesis about the take-off in inflation in the early 1970s. According to the expectations trap hypothesis, the Fed was driven to high money growth by a fear of violating the expectations of high inflation that existed at the time. The authors argue that this hypothesis is more compelling than the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate by product of a conscious decision to jump start a weak economy.Inflation (Finance) ; Phillips curve

The expectations trap hypothesis

The authors examine the inflation take-off of the early 1970s in terms of the expectations trap hypothesis, according to which fear of violating the public’s inflation expectations pushed the Fed into producing high inflation. This interpretation is compared with the Phillips curve hypothesis, according to which the Fed produced high inflation as the unfortunate byproduct of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what should be done to prevent future inflation flare-ups.Inflation (Finance) ; Phillips curve ; Economic conditions - United States