Trends in hours, balanced growth, and the role of technology in the business cycle

This paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, the author argues that, contrary to what is often believed, there are many reasons why hours could be nonstationary in those models, while preserving the property of balanced growth. Second, the author shows that the postwar evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, he examines the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries.Business cycles ; Technology ; Labor productivity

Targeting Inflation in an Economy with Staggered Price Setting

The present paper inquiries into the nature and workings of an inflation targeting regime using as a reference framework an optimizing monetary business cycle model with staggered price setting. The interest rate rule that keeps inflation constant at its target level (optimal inflation targeting rule) is derived. The properties of two simpler rules - namely, a version of the Taylor rule and a proposed forward looking extension - are analyzed and compared with those of the optimal rule. The implications of the presence of data noise for the performance of those rules are also examined.

The new Keynesian approach to monetary policy analysis: Lessons and new directions

I discuss several lessons regarding the design and conduct of monetary policy that have emerged out of the New Keynesian research program. Those lessons include the bene.ts of price stability, the gains from commitment about future policies, the importance of nat- ural variables as benchmarks for policy, and the bene.ts of a credible anti-inflationary stance. I also point to one challenge facing NK modelling efforts: the need to come up with relevant sources of policy tradeoffs. A potentially useful approach to meeting that challenge, based on the introduction of real imperfections, is presented.Sticky prices, optimal policy, interest rate rules, policy tradeoffs, credibility, gains from commitment

The monetary pillar and the great financial crisis

Since its inception, a most distinctive (and controversial) feature of the ECB monetary policy strategy has been its emphasis on money and monetary analysis, which constitute the basis of the so-called monetary pillar. The present paper examines the performance of the monetary pillar around the recent financial crisis episode, and discusses its prospects in light of the renewed emphasis on financial stability and the need for enhanced macro-prudential policies.monetary policy strategy, two pillar strategy, monetarism, financial stability.

Modern perspectives on stabilization policies

The present paper describes recent research on two central themes of Keynes’ General Theory: (i) the social waste associated with recessions, and (ii) the effectiveness of fiscal policy as a stabilization tool. The paper also discusses some evidence on the extent to which fiscal policy has been used as a stabilizing tool in industrial economies over the past two decades.business cycles, inefficient allocations, government spending multiplier, non-Ricardian households, countercyclical policies

Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework

The New Keynesian framework has emerged as the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. It is the backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, and provides the theoretical underpinnings of the inflation stability-oriented strategies adopted by most central banks throughout the industrialized world. This graduate-level textbook provides an introduction to the New Keynesian framework and its applications to monetary policy. Using a canonical version of the New Keynesian model as a reference framework, Jordi Galí explores issues pertaining to the design of monetary policy, including the determination of the optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the implications for monetary policy are addressed, with a special emphasis on the desirability of inflation targeting policies.monetary policy, inflation, business cycle, Keynes, welfare

Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework

The New Keynesian framework has emerged as the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. It is the backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, and provides the theoretical underpinnings of the inflation stability-oriented strategies adopted by most central banks throughout the industrialized world. This graduate-level textbook provides an introduction to the New Keynesian framework and its applications to monetary policy. Using a canonical version of the New Keynesian model as a reference framework, Jordi Galí explores issues pertaining to the design of monetary policy, including the determination of the optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the implications for monetary policy are addressed, with a special emphasis on the desirability of inflation targeting policies.monetary policy, inflation, business cycle, Keynes, welfare

On the sources of the Great Moderation

The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes.Great Moderation, structural VAR, technology shocks, monetary policy rules, labor hoarding

Macroeconomic Modeling for Monetary Policy Evaluation

We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation of macro models, and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: the significant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.

Optimal monetary and fiscal policy in a currency union

We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and study its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal cooperative policy arrangement requires that inflation be stabilized at the union level by the common central bank, while fiscal policy is used by each country for stabilization purposes. By contrast, when the fiscal authorities act in a non-coordinated way, their joint actions lead to a suboptimal outcome, and make the common central bank face a trade-off between inflation and output gap stabilization at the union level.Monetary union, sticky prices, countercyclical policy, inflation differentials