Search Results
Working Paper
Monetary policy and uncertainty about the natural unemployment rate
This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the short-run inflation-unemployment tradeoff. Two conflicting motives drive policy. In the static version of the model, uncertainty provides a motive for the policymaker to move cautiously. In the dynamic version, uncertainty motivates an element of experimentation. I find that the optimal policy that balances these motives typically still exhibits gradualism, i.e., is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and ...
Working Paper
Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero
This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound constraint on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are very non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the ...
Working Paper
NAIRU uncertainty and nonlinear policy rules
Meyer (1999) has suggested that episodes of heightened uncertainty about the NAIRU may warrant a nonlinear policy response to changes in the unemployment rate. This paper offers a theoretical justification for such a nonlinear policy rule, and provides some empirical evidence on the relative performance of linear and nonlinear rules when there is heightened uncertainty about the NAIRU.
Working Paper
Data uncertainty and the role of money as an information variable for monetary policy
This paper demonstrates that money can play an important role as an information variable and may result in major improvements in current output estimates. However, the specific nature of this role depends on the magnitude of the output measurement error relative to the money demand shock. In particular, we find noticeable but small improvements in output estimates due to the inclusion of money growth in the information set. Money plays a quantitatively more important role with regard to output estimation if we allow for a contribution of monetary analysis in reducing uncertainty due to money ...
Journal Article
Economic projections and rules of thumb for monetary policy
Monetary policy analysts often rely on rules of thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy with historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules of thumb should draw on policymakers' forecasts of key variables, such as inflation and unemployment, or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor ...
Conference Paper
Certainty equivalence - discussion
Working Paper
Inflation dynamics and international linkages: a model of the United States, the euro area, and Japan
In this paper we estimate a small macroeconometric model of the United States, the euro area and Japan with rational expectations and nominal rigidities due to staggered contracts. Comparing three popular contracting specifications we find that euro area and Japanese inflation dynamics are best explained by Taylor-style contracts, while Buiter-Jewitt/Fuhrer-Moore contracts perform somewhat better in fitting U.S. inflation dynamics. We are unable to fit Calvo-style contracts to inflation dynamics in any of the three economies without allowing either for ad-hoc persistence in unobservables or a ...
Working Paper
Learning by doing and the value of optimal experimentation
Research on learning-by-doing has typically been restricted to cases where estimation and control can be treated separately. Recent work has provided convergence results for more general learning problems where experimentation is an important aspect of optimal control. However the associated optimal policy cannot be derived analytically because Bayesian learning introduces a nonlinearity in the dynamic programming problem. This paper characterizes the optimal policy numerically and shows that it incorporates a substantial degree of experimentation. Dynamic simulations indicate that optimal ...
Working Paper
A quantitative exploration of the opportunistic approach to disinflation
A number of observers have advocated recently that the Federal Reserve take an ``opportunistic'' approach to the conduct of monetary policy. A hallmark of this approach is that the central bank focuses on fighting inflation when inflation is high, but focuses on stabilizing output when inflation is low. The implied policy rule is nonlinear. This paper compares the behavior of inflation and output under opportunistic and conventional linear policies. Using stochastic simulations of a small-scale rational expectations model, we study the cost and time required to achieve a given disinflation, ...
Working Paper
Efficient monetary policy design near price stability
We study the design of monetary policy in a low inflation environment taking into account the limitations imposed by the zero bound on nominal interest rates. Using numerical dynamic programming methods, we compute optimal policies in a simple, calibrated open-economy model and evaluate the effect of the liquidity trap generated by the zero bound. We consider the possibility that the quantity of base money may affect output and inflation even when the interest rate is constrained at zero and explicitly account for the substantial degree of uncertainty regarding such quantity effects. As an ...