Stabilisation bias in monetary policy under endogenous price stickiness

This paper investigates the consequences of introducing endogenous price stickiness into a standard monetary policy model. We find that the modification reduces the optimal degree of inflation stabilization to which the central bank should commit. The reason is that less inflation stabilization encourages firms to review their prices more frequently. The economy becomes more flexible and the Phillips-curve tradeoff is improved, making it easier for the central bank to control inflation. This reduces, and may even reverse, the stabilization bias that is present in models with exogenous price stickiness and that recommends that the central bank generally commit to tighter stabilization of inflation than it would in a discretionary policy regime.price stickiness; monetary policy; stabilization bias

Inflation and output volatility under asymmetric incomplete information

The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility. JEL Classification: E32, E37, E52Asymmetric information, Imperfect credibility, Signal extraction

Saddlepath Learning

Saddlepath learning occurs when agents know the form but not the coefficients of the sad?dlepath relationship defining rational expectations equilibrium. Under saddlepath learning, we obtain a completely general relationship between determinacy and e-stability, and generalise Min?imum State Variable results previously derived only under full information. When the system is determinate, we show that a learning process based on the saddlepath is always e-stable. When the system is indeterminate, we find there is a unique MSV solution that is iteratively e-stable. However, in this case there is a sunspot solution that is learnable as well. We conclude by demon?strating that our results hold for any information set.e-stability, determinacy, learning, saddlepath stability.

Optimal Monetary Policy When Lump-Sum Taxes Are Unavailable: A Reconsideration of the Outcomes under Commitment and Discretion

We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we show that the economy will not necessarily tend to the Friedman Rule, as Obstfeld found. Instead it may tend to the critical debt level at which there is no cheating incentive under commitment, and inflation and could well be positive here.Time consistency; optimal inflation-tax smoothing; discretion; commitment; Friedman Rule.

Caution or activism? Monetary policy strategies in an open economy

We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks

Monetary policy and learning in an open economy

In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious.activism; learning; monetary policy; open economy

Regime-dependent impulse response functions in a Markov-switching vector autoregression model

In this paper we introduce identifying restrictions into a Markov-switching vector autoregression model. We define a separate set of impulse responses for each Markov regime to show how fundamental disturbances affect the variables in the model dependent on the regime. We go to illustrate the use of these regime-dependent impulse response functions in a model of the U.S. economy. The regimes we identify come close to the “old” and “new economy” regimes found in recent research. We provide evidence that oil price shocks are much less contractionary and inflationary than they used to be. We show furthermore that the decoupling of the US economic performance from oil price shocks cannot be explained by “good luck” alone, but that structural changes within the US economy have taken place.vector autoregression; regime switching; shocks; new economy

Monetary policy and learning in an open economy

In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious.activism, learning, monetary policy, open economy

Caution or Activism? Monetary Policy Strategies in an Open Economy

We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central bankslearning; monetary policy, open economy