scholarly journals Financial Heterogeneity and the Investment Channel of Monetary Policy

Econometrica ◽  
2020 ◽  
Vol 88 (6) ◽  
pp. 2473-2502
Author(s):  
Pablo Ottonello ◽  
Thomas Winberry
Keyword(s):  
Monetary Policy ◽  
Default Risk ◽  
Firm Heterogeneity ◽  
New Keynesian ◽  
Cost Curve ◽  
Monetary Shocks ◽  
Keynesian Model ◽  
Aggregate Effect ◽  
Heterogeneous Firm ◽  
Effect Of Monetary Policy

We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk—those with low debt burdens and high “distance to default”— are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low‐risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.

scholarly journals Monetary policy and news shocks: are Taylor rules forward-looking?

2016 ◽  
Vol 16 (2) ◽  
Author(s):  
Gabriela Best ◽  
Pavel Kapinos
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Taylor Rule ◽  
New Keynesian ◽  
Monetary Shocks ◽  
Taylor Rules ◽  
Macroeconomic Conditions ◽  
Econometric Methods ◽  
Keynesian Model ◽  
Forward Looking

AbstractThis paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model’s fit to the US data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

scholarly journals On the Limits of Macroprudential Policy

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Marcin Kolasa
Keyword(s):  
Monetary Policy ◽  
Policy Instruments ◽  
New Keynesian ◽  
Output Volatility ◽  
Macroprudential Policy ◽  
Collateral Constraints ◽  
Keynesian Model ◽  
Additional Stabilization ◽  
The Interest Rate

AbstractThis paper studies how macroprudential policy tools applied to the housing market can complement the interest rate-based monetary policy in achieving one additional stabilization objective, defined as keeping either economic activity or credit at some exogenous (and possibly time-varying) levels. We show analytically in a canonical New Keynesian model with housing and collateral constraints that using the loan-to-value (LTV) ratio, tax on credit or tax on property as additional policy instruments does not resolve the inflation-output volatility tradeoff. Perfect targeting of inflation and credit with monetary and macroprudential policy is possible only if the role of housing debt in the economy is sufficiently small. The identified limits to the considered policies are related to their predominantly intertemporal impact on decisions made by financially constrained agents, making them poor complements to monetary policy, which also operates at an intertemporal margin. These limits can be overcome if macroprudential policy is instead designed such that it sufficiently redistributes income between savers and borrowers.

scholarly journals Information Use and the Condorcet Jury Theorem

Mathematics ◽  
2021 ◽  
Vol 9 (10) ◽  
pp. 1098
Author(s):  
Keiichi Morimoto
Keyword(s):  
Monetary Policy ◽  
Voting Behavior ◽  
Imperfect Information ◽  
Information Use ◽  
Information Aggregation ◽  
New Keynesian ◽  
Strategic Complementarity ◽  
Keynesian Model ◽  
Jury Theorem

Using a simple model of a coordination game, this paper explores how the information use of individuals affects an optimal committee size. Although enlarging the committee promotes information aggregation, it also stimulates the members’ coordination motive and distorts their voting behavior through higher-order beliefs. On the determination of a finite optimal committee size, the direction and degree of strategic interactions matter. When the strategic complementarity among members is strong, a finite optimal committee size exists. In contrast, it does not exist under strategic substitution. This mechanism is applied to the design of monetary policy committees in a New Keynesian model in which a committee conducts monetary policy under imperfect information.

ARE MAJOR CENTRAL BANKS BLINDED BY THE ANALYTICAL ELEGANCE OF THEIR MODELS? POSSIBLE COSTS OF UNCONVENTIONAL MONETARY POLICY MEASURES

2017 ◽  
Vol 62 (01) ◽  
pp. 87-108 ◽  
Author(s):  
PIOTR CIŻKOWICZ ◽  
ANDRZEJ RZOŃCAZ
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Significant Risk ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Unconventional Monetary Policy ◽  
Keynesian Model ◽  
Policy Measures ◽  
The Global Financial Crisis

We survey the possible costs of the unconventional monetary policy measures undertaken by major central banks after the outbreak of the global financial crisis in 2008. We argue that these costs are not easily discernable in the new Keynesian (NK) model, which defines a theoretical framework for monetary policy. First, the costs may result from the effects of unconventional monetary policy measures on the intensity of restructuring and the persistence of uncertainty (which increased after the outbreak of the crisis). However, neither of these processes is considered in the new Keynesian model. Second, costs may be generated not only by distortions in the choices made by economic agents but may also be a result of the decisions made by governments, particularly in terms of the fiscal deficit level. However, the new Keynesian model does not consider the effects of unconventional monetary policy measures on the quality of fiscal policy. Without carefully considering the costs, there is a significant risk that unconventional monetary policy measures could become a conventional response to recurrent crises.

Optimal fiscal and monetary policy under different fiscal instruments

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.

Generalizing the Taylor Principle: Reply

2010 ◽  
Vol 100 (1) ◽  
pp. 618-624 ◽  
Author(s):  
Troy Davig ◽  
Eric M Leeper
Keyword(s):  
Monetary Policy ◽  
Regime Switching ◽  
Multiple Solutions ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
The One

Farmer, Waggoner, and Zha (2009) (FWZ) show that a new Keynesian model with regime-switching monetary policy can support multiple solutions, appearing to contradict findings in Davig and Leeper (2007) (DL). The explanation is straightforward: FWZ derive solutions using a model that differs from the one to which the DL conditions apply. The FWZ solutions also require that the exogenous driving process is a function of private and policy parameters. This undermines the sharp distinctions among “deep parameters” typical of optimizing models and makes it difficult to ascribe economic interpretations to FWZ's additional solutions. (E12, E31, E43, E52)

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