scholarly journals Optimal Monetary Policy when Information is Market-Generated

2020 ◽  
Vol 130 (628) ◽  
pp. 956-975 ◽  
Author(s):  
Kenza Benhima ◽  
Isabella Blengini
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Optimal Policy ◽  
Labour Supply ◽  
Limited Attention ◽  
Optimal Monetary Policy ◽  
The Public ◽  
Supply Shocks ◽  
Individual Demand ◽  
Real Shocks

Abstract The nature of the private sector’s information changes the optimal conduct of monetary policy. When firms observe their individual demand and use it as a signal of real shocks, the optimal policy consists in maximising the information content of that signal. When real shocks are deflationary (like labour supply shocks), the optimal policy is countercyclical and magnifies price movements, which contrasts with the exogenous information case, where optimal monetary policy is procyclical and stabilises prices. When the central bank communicates its information to the public, this policy is still optimal if firms pay limited attention to central bank announcements.

scholarly journals Robustly Optimal Monetary Policy with Near-Rational Expectations

2010 ◽  
Vol 100 (1) ◽  
pp. 274-303 ◽  
Author(s):  
Michael Woodford
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Optimal Policy ◽  
Rational Expectations ◽  
Stabilization Policy ◽  
Optimal Monetary Policy ◽  
Inflation Target ◽  
Model Consistency ◽  
Long Run

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. (JEL C62, D84, E13, E31, E32, E52)

OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH

2014 ◽  
Vol 19 (7) ◽  
pp. 1427-1475 ◽  
Author(s):  
Anna Lipińska
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
Nominal Exchange Rate ◽  
Nominal Interest Rate ◽  
Output Gap ◽  
Optimal Monetary Policy ◽  
Accession Countries ◽  
Dynamic Stochastic ◽  
Maastricht Criteria

This paper uses a dynamic stochastic general equilibrium model of a two-sector small open economy to analyze how the Maastricht criteria modify a fully credible optimal monetary policy in the Economic and Monetary Union accession countries. We show that if the country is not constrained by the criteria, optimal policy should stabilize fluctuations in PPI inflation, in the aggregate output gap, and in the domestic and international terms of trade. The optimal policy constrained permanently by the Maastricht criteria is characterized by reduced variability of the nominal exchange rate, CPI inflation, and the nominal interest rate and by lower optimal targets for CPI inflation and nominal interest rate. This policy results in higher variability and nonzero means for both PPI inflation and output gap, thus leading to additional, but small, welfare costs compared with the unconstrained policy.

Introduction

2021 ◽  
pp. 1-28
Author(s):  
Massimo Rostagno ◽  
Carlo Altavilla ◽  
Giacomo Carboni ◽  
Wolfgang Lemke ◽  
Roberto Motto ◽  
...  
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Public Good ◽  
Monetary Union ◽  
European Central Bank ◽  
The Public ◽  
European Central ◽  
The Past ◽  
The Future ◽  
20Th Anniversary

Institutions dedicated to serving the public good must look to the past to learn from experience; and look to the future to prepare, as best they can, for the trials that might lie ahead. The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to apply such a perspective to the monetary policy of the European Central Bank (ECB): to evaluate its accomplishments and to learn the lessons that can improve the conduct of its policy in the future....

scholarly journals ROBUST MONETARY POLICY IN A NEW KEYNESIAN MODEL WITH IMPERFECT INTEREST RATE PASS-THROUGH

2015 ◽  
Vol 20 (6) ◽  
pp. 1504-1526 ◽  
Author(s):  
Rafael Gerke ◽  
Felix Hammermann
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Model Misspecification ◽  
New Keynesian ◽  
Optimal Monetary Policy ◽  
Loan Rate ◽  
Keynesian Model ◽  
Pass Through ◽  
Policy Shifts

We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. We find that, first, whether robust optimal monetary policy under commitment responds more cautiously or more aggressively depends crucially on the source of shock. Imperfect pass-through amplifies the robust policy. Second, if the central bank is concerned about uncertainty, it dampens volatility in the inflation rate preemptively but accepts higher volatility in the output gap and loan rate. However, for highly sticky loan rates, insurance against model misspecification becomes particularly pricy. Third, if the central bank fears uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilization away from inflation.

Testing monetary policy optimality using volatility outcomes: a novel approach

2016 ◽  
Vol 16 (2) ◽  
Author(s):  
Federico Ravenna
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
The United States ◽  
New Keynesian ◽  
Model Parameters ◽  
Dsge Models ◽  
Optimal Monetary Policy ◽  
Novel Approach ◽  
Interest Rate Volatility

AbstractWe propose a method to assess the efficiency of macroeconomic outcomes using the restrictions implied by optimal policy DSGE models for the volatility of observable variables. The method exploits the variation in the model parameters, rather than random deviations from the optimal policy. In the new Keynesian business cycle model this approach shows that optimal monetary policy imposes tighter restrictions on the behavior of the economy than is readily apparent. The method suggests that for the historical output, inflation and interest rate volatility in the United States over the 1984–2005 period to be generated by any optimal monetary policy with a high probability, the observed interest rate time series should have a 25% larger variance than in the data.

PARAMETER UNCERTAINTY AND NONLINEAR MONETARY POLICY RULES

2010 ◽  
Vol 15 (2) ◽  
pp. 184-200 ◽  
Author(s):  
Peter Tillmann
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Empirical Evidence ◽  
Parameter Uncertainty ◽  
Phillips Curve ◽  
Optimal Monetary Policy ◽  
Worst Case ◽  
Rate Adjustment ◽  
The Interest Rate

Empirical evidence suggests that the instrument rule describing the interest rate–setting behavior of the Federal Reserve is nonlinear. This paper shows that optimal monetary policy under parameter uncertainty can motivate this pattern. If the central bank is uncertain about the slope of the Phillips curve and follows a min–max strategy to formulate policy, the interest rate reacts more strongly to inflation when inflation is further away from target. The reason is that the worst case the central bank takes into account is endogenous and depends on the inflation rate and the output gap. As inflation increases, the worst-case perception of the Phillips curve slope becomes larger, thus requiring a stronger interest rate adjustment. Empirical evidence supports this form of nonlinearity for post-1982 U.S. data.

scholarly journals More Gray, More Volatile? Aging and (Optimal) Monetary Policy

2019 ◽  
Vol 19 (198) ◽  
Author(s):  
Daniel Baksa ◽  
Zsuzsa Munkacsi
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Labor Force ◽  
Central Banks ◽  
Olg Model ◽  
Optimal Monetary Policy ◽  
Inflation Volatility ◽  
Downward Pressure ◽  
Advanced Economies ◽  
Nominal Variables

The evidence on the inflation impact of aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model, we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first, using this framework, to discuss how aging affects the transmission channels of monetary policy. We are also the first to examine aging and optimal central bank policies. As aging redistributes wealth among generations and the labor force becomes more scarce, our model suggests that aging makes monetary policy less effective and in more gray societies central banks should react more strongly to nominal variables.

Risks are high despite Turkey’s policy 'normalisation'

2020 ◽  
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Risk Premium ◽  
Financial Stability ◽  
Foreign Debt ◽  
Content Type ◽  
The Public ◽  
High Inflation ◽  
The Government

Significance With the lira at a record low, the Central Bank continued to tighten monetary policy this week, funding the market through competitive one-month repo tenders at rates of around 12.5%. In recent weeks, the government and Central Bank have taken a series of steps to modify the expansionary and in some cases unorthodox policies adopted during the COVID-19 pandemic. Impacts Foreign portfolio investors could shun the Turkish market for some more months, and the risk premium will remain high. Although this year’s annual contraction in GDP, at 3-4%, may be less severe than expected, the recovery may decelerate or be interrupted. The lira may fall further with concerns about foreign debt, forex reserves, budgets, inflation and financial stability persisting into 2021. Given the weak lira, the jobs crisis and high inflation, the government will struggle to persuade the public it has managed the crisis well.

scholarly journals Monetary Policy for a Bubbly World

2020 ◽  
Author(s):  
Vladimir Asriyan ◽  
Luca Fornaro ◽  
Alberto Martin ◽  
Jaume Ventura
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Financial Frictions ◽  
Optimal Monetary Policy ◽  
Future Value ◽  
Money Creation ◽  
The Creation

Abstract What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for “unbacked” assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank. Bubbles and money share many features, but they also differ in two crucial respects. First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.

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