Optimal Monetary Policy with an Occasionally Binding ZLB and Central Bank Asset Purchases

2020 ◽  
Author(s):  
Ronald Mau ◽  
Mikheil Dvalishvili
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Optimal Monetary Policy ◽  
Asset Purchases

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 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.

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 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)

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.

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.

scholarly journals Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Tobias S. Blattner ◽  
Jonathan M. Swarbrick
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Structure ◽  
Real Economy ◽  
Interbank Market ◽  
Cross Border ◽  
Market Fragmentation ◽  
Initial Shock ◽  
Asset Purchases

AbstractWe present a two-country model featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) asset purchases and central bank long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy.

scholarly journals Robust monetary policy in a currency union

2012 ◽  
Vol 59 (2) ◽  
pp. 185-199
Author(s):  
Olga Kuznetsova
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Model Uncertainty ◽  
Currency Union ◽  
Optimal Monetary Policy ◽  
Economic Shocks ◽  
Worst Case ◽  
Attenuation Effect ◽  
Optimal Reaction ◽  
Country Specific

A great number of recent researches have found importance of country specific shocks for optimal monetary policy construction in the context of a currency union. This however has been almost completely overlooked by the analysis of optimal monetary policy under model uncertainty. The main purpose of our work is to fill this gap. By using a model of a two-country currency union with sticky prices, we have derived robust monetary policy that works reasonably well even in the worst case of model perturbations. We find some anti-attenuation effect of uncertainty, and show that the central bank?s optimal reaction to economic shocks becomes more aggressive with an increase in the extent of misspecification.

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