Computation of LQ Approximations to Optimal Policy Problems in Different Information Settings under Zero Lower Bound Constraints

This paper describes a series of algorithms that are used to compute optimal policy under full and imperfect information. Firstly we describe how to obtain linear quadratic (LQ) approximations to a nonlinear optimal policy problem. We develop novel algorithms that are required as a result of having agents with forward-looking expectations, that go beyond the scope of those that are used when all equations are backward-looking; these are utilised to generate impulse response functions and second moments for the case of imperfect information. We describe algorithms for reducing a system to minimal form that are based on conventional approaches, and that are necessary to ensure that a solution for fully optimal policy can be computed. Finally we outline a computational algorithm that is used to generate solutions when there is a zero lower bound constraint for the nominal interest rate.

Robust Monetary Rules under Unstructured and Structured Model Uncertainty

This paper compares two contrasting approaches to robust monetary policy design. The first developed by Hansen and Sargent (2003, 2007) assumes unstructured model uncertainty and uses a minimax robustness criterion to design monetary rules. This contrasts with an older literature that structures uncertainty by seeking rules that are robust across competing views of the economy. This paper carries out and compares robust design exercises using both approaches using a standard ‘canonical New Keynesian model’. We pay particular attention to a number of issues: First, we distinguish three possible forms of the implied game between malign nature and the policymaker in the Hansen-Sargent procedure. Second, in both approaches, we examine the consequences for robust rules of the zero lower bound (ZLB) constraint on the nominal interest rate, the monetary instrument. Finally, again for both types of robustness exercise we explore the implications of policy design when the policymaker is obliged to use simple Taylor-type interest rate rules.robustness, structured and unstructured uncertainty, zero lower bound interest rate constraint

Monetary and Fiscal Policy in a DSGE Model of India.

We develop a optimal rules-based interpretation of the 'three pillars macroeconomic policy framework': a combination of a freely floating exchange rate, an explict target for inflation, and a mechanism than ensures a stable government debt-GDP ratio around a specified long run. We show how such monetary-fiscal rules need to be adjusted to accommodate specific features of emerging market economies.The model takes the form of two-blocs, a DSGE emerging small open economy interacting with the rest of the world and features, in particular, financial frictions. It is calibrated using India and US data. Alongside the optimal Ramsey policy benchmark, we model the three pillars as simple monetary and fiscal rules including and both domestic and CPI inflation targeting interest rate rules. A comparison with a fixed exchange rate regime is ade. We find that domestic inflation targeting is superior to partially or implicitly (through a CPI inflation target) or fully attempting to stabilizing the exchange rate. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy. These policy prescriptions contrast with the monetary-fiscal policy stance of the Indian authorities.Monetary policy ; Emerging economies ; Fiscal and monetary rules ; Financial accelerator ; Liability dollarization

A Photographic Study of Freezing of Water Droplets Falling Freely in Air

A photographic technique for investigating water droplets of diameter less than 200 microns falling freely in air at temperatures between 0 C and -50 C has been devised and used to determine: (i) The shape of frozen droplets (2) The occurrence of collisions of partly frozen or of frozen and liquid droplets (3) The statistics on the freezing temperatures of individual free-falling droplets A considerable number of droplets were found to have a nonspherical shape after freezing because of various protuberances and frost growth, and droplet aggregates formed by collision. The observed frequency of collision of partly frozen droplets showed good order of magnitude agreement with the frequency computed from theoretical collection efficiencies. The freezing temperature statistics indicated a general similarity of the data to those obtained for droplets frozen on a metallic surface in previous experiments

Adaptation of a Cascade Impactor to Flight Measurement of Droplet Size in Clouds

A cascade impactor, an instrument for obtaining: the size distribution of droplets borne in a low-velocity air stream, was adapted for flight cloud droplet-size studies. The air containing the droplets was slowed down from flight speed by a diffuser to the inlet-air velocity of the impactor. The droplets that enter the impactor impinge on four slides coated with magnesium oxide. Each slide catches a different size range. The relation between the size of droplet impressions and the droplet size was evaluated so that the droplet-size distributions may be found from these slides. The magnesium oxide coating provides a permanent record. of the droplet impression that is not affected by droplet evaporation after the. droplets have impinged

The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott

Macroeconomics research has changed profoundly since the Kydland-Prescott seminal paper. In order to address the Lucas Critique, modelling now is based on microfoundations treating agents as rational utility optimizers. Bayesian estimation has produced models which are more data consistent than those based simply on calibration. With micro-foundations and new linear-quadratic techniques, normative policy based on welfare analysis is now possible. In the open economy, policy involves a ‘game’ with policymakers and private institutions or private individuals as players. This paper attempts to reassess the Kydland-Prescott contribution in the light of these developments.Monetary rules, commitment, discretion, open economy, coordination gains.

Robust Inflation-Targeting Rules and the Gains from International Policy Coordination

This paper empirically assesses the performance of interest-rate monetary rules for interdependent economies characterized by model uncertainty. We set out a two-bloc dynamic stochastic general equilibrium model with habit persistence (that generates output persistence), Calvo pricing and wage-setting with indexing of non-optimized prices and wages (generating inflation persistence), incomplete financial markets and the incomplete pass-through of exchange rate changes. We estimate a linearized form of the model by Bayesian maximum-likelihood methods using US and Euro-zone data. From the estimates of the posterior distributions we then examine monetary policy conducted both independently and cooperatively by the Fed and the ECB in the form of robust inflation-targeting interest-rate rules. Comparing the utility outcome in a closed-loop Nash equilibrium with the outcome from a coordinated design of policy rules, we find a new result: the gains from monetary policy coordination rise significantly when CPI inflation targeting interest-rate rules are designed to account for model uncertainty.monetary policy coordination, robustness, inflation-targeting interest-rate rules.

The Immigration Surplus Revisited in a General Equilibrium Model with Endogenous Growth

We revisit the work of Borjas (1995) which has provided an influential positive theory of immigration policy. An important feature of his framework is the focus on the skill-composition of immigrants and we retain this feature in our paper. Our contribution to this literature is to extend his analysis in a number of directions. First, we study the immigration surplus in the context of a general equilibrium model in which capital is endogenous and the welfare of the indigenous population is set out explicitly. Second, we introduce several sectors into the model so that changing the skill composition leads to changes in sector shares. Third, related to the second development, we introduce and R&D sector and develop a model with long-term endogenous growth. The result is that growth effects on the Immigration Surplus come to dominate the purely static effects in the original analysis of Borjas, but they are not sufficient to eliminate the emergence of losers among the section of natives competing with immigrants in the labour market.immigration surplus, economic growth, income distribution

Fiscal Policy in a Monetary Union: Can Fiscal Cooperation be Counterproductive?

We analyze the interaction of monetary and fiscal policies in a monetary union where the common central bank is more conservative than the fiscal authorities. When monetary and fiscal policies are discretionary, we find that the Nash equilibrium is sub-optimal with higher output and lower inflation than the cooperative Ramsey op- timum. In a further example of counterproductive cooperative, we find that fiscal cooperation makes matters worse. We also examine cooperative and non-cooperative fiscal policy in the case where the central bank can commit and has the same prefer- ences as the fiscal authorities.fiscal-monetary policy interactions, fiscal cooperation and non-cooperation.

Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetised Debt?

The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank (CB sets the nominal interest rate and responds to rising government debt/GDP ratios by monetisation. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the CB removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.monetary union, fiscal policy coordination, monetary and fiscal policy interdependence, reputation.