Supply Shocks, Sticky Prices, and Monetary Policy: Note

In this paper, China’s core inflation is defined as any price changes that are caused by the money supply. This definition is especially relevant to examining monetary policy because the money supply is controllable by China’s central bank. This paper develops a New Keynesian DSGE model with a quantity-based monetary rule that fits real aggregated data from China to analyze core inflation’s key characteristics. Eight different approaches are used to estimate core inflation in China. By constructing VAR models of output growth, money supply growth and core inflation, we estimate the response of core inflation measures to the money supply shock. By matching the response to money supply shocks in both the model and the data, we compare the performance of different core inflation measures for monetary policy in China.

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Optimal fiscal and monetary policy under different fiscal instruments

Journal of Economic Studies ◽

10.1108/jes-11-2019-0508 ◽

2020 ◽

Vol 48 (1) ◽

pp. 167-190

Author(s):

Mehrab Kiarsi

Keyword(s):

Monetary Policy ◽

Inflation Rate ◽

Dynamic Properties ◽

Sticky Prices ◽

New Keynesian ◽

Content Type ◽

Friedman Rule ◽

Keynesian Model ◽

Fiscal And Monetary Policy ◽

Cash In Advance

PurposeThe paper includes characterizing Ramsey policy in a cash-in-advance monetary model, under flexible and sticky prices, and with different fiscal instruments.Design/methodology/approachThe paper analytically and numerically characterizes the dynamic properties of Ramsey allocations. The author computes dynamics by solving second-order approximations to the Ramsey planner’s policy functions around a non-stochastic Ramsey steady state.FindingsThe Friedman rule is not mainly optimal in a cash-in-advance model with distorting taxes. The Ramsey-optimal policy with both taxes on income and consumption calls for a high inflation rate that is extremely volatile, despite the fact that changing prices is costly.Practical implicationsThe optimality of zero nominal interest rate under flexible prices in monetary models is not mainly the case and quite depends on the preferences. The optimality of a zero inflation rate under sticky prices also very much depends on the assumed set of fiscal instruments.Originality/valueThe non-optimality of the Friedman rule under flexible prices is quite new. Moreover, studying the optimal fiscal and monetary policy in a New Keynesian model with a rich set of fiscal instruments is also quite original.

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Optimal Monetary Policy when Information is Market-Generated

The Economic Journal ◽

10.1093/ej/ueaa007 ◽

2020 ◽

Vol 130 (628) ◽

pp. 956-975 ◽

Cited By ~ 1

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.

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Monetary Policy and Credit Supply Shocks

IMF Economic Review ◽

10.1057/imfer.2011.9 ◽

2011 ◽

Vol 59 (2) ◽

pp. 195-232 ◽

Cited By ~ 37

Author(s):

Simon Gilchrist ◽

Egon Zakrajšek

Keyword(s):

Monetary Policy ◽

Credit Supply ◽

Supply Shocks

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Sticky-Price Models and Durable Goods

The American Economic Review ◽

10.1257/aer.97.3.984 ◽

2007 ◽

Vol 97 (3) ◽

pp. 984-998 ◽

Cited By ~ 117

Author(s):

Robert B Barsky ◽

Christopher L House ◽

Miles S Kimball

Keyword(s):

Monetary Policy ◽

Durable Goods ◽

Sticky Prices ◽

Price Rigidity ◽

Aggregate Output ◽

Limiting Case

The inclusion of a durable goods sector in sticky-price models has strong and unexpected implications. Even if most prices are flexible, a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky. In contrast, flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models. In a limiting case, flexibly priced durables cause monetary policy to have no effect on aggregate output. Our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity. (JEL E21, E23, E31, E52)

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Pre-conditions for Inflation Targeting in an Emerging Economy: The Case of India

Global Economy Journal ◽

10.1515/gej-2012-0014 ◽

2013 ◽

Vol 13 (1) ◽

pp. 89-108 ◽

Cited By ~ 4

Author(s):

Ankita Mishra

Keyword(s):

Monetary Policy ◽

Inflation Targeting ◽

Emerging Economy ◽

Policy Option ◽

Target Range ◽

Policy Regime ◽

Indian Economy ◽

Major Threat ◽

Supply Shocks

This article looks at the preconditions that an emerging economy needs to fulfill, before it can adopt inflation targeting as a monetary policy regime. The study is conducted using the Indian economy as a case study. We conduct sector-wise analysis of the Indian economy to evaluate the independence of India’s monetary policy from fiscal, external, structural and financial perspectives. Dominance from any of these sectors may divert monetary policy from the objective of maintaining price stability in the economy. Our analysis suggests that among the four dominance issues, the issue of “structural dominance” is the most acute for India. Supply shocks, hitting the economy due to structural bottlenecks, pose a major threat to the independent conduct of monetary policy. This study concludes that inflation band targeting with a wide target range would be a feasible monetary policy option for India.

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