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Working Paper
Some unpleasant properties of loglinearized solutions when the nominal rate is zero
Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian (NK) literature is that the answer to this question is yes. Evidence presented here suggests that the NK model's implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05.
Working Paper
Fiscal Forward Guidance: A Case for Selective Transparency
Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic stochastic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks. Analytical as well as numerical experiments show that selective transparency is desirable?announcing future fiscal policy shocks that are distortionary can be detrimental to ex ante social welfare, whereas announcing nondistortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a ...
Working Paper
Generational War on Inflation: Optimal Inflation Rates for the Young and the Old
How does a grayer society affect the political decision-making regarding inflation rates? Is deflation preferred as a society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively, and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates, with the optimal inflation rates differing between generations. The rates can be significantly different ...
Working Paper
Small and orthodox fiscal multipliers at the zero lower bound
Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian literature is that the answer is yes. New evidence provided here suggests that the answer is often no. For a broad range of empirically relevant parameterizations of the Rotemberg model of costly price adjustment, the government purchase multiplier is about one or less, and the response of hours to a tax cut is either negative or close to zero.
Working Paper
The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information
This paper considers the optimal degree of monetary-discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant ?constrained discretion? to the central bank by imposing both upper and lower bounds on permissible inflation, and that ...
Working Paper
Private news and monetary policy forward guidance or (the expected virtue of ignorance)
How should monetary policy be designed when the central bank has private information about future economic conditions? When private news about shocks to future fundamentals is added to an otherwise standard new Keynesian model, social welfare deteriorates by the central bank?s reaction to or revelation of such news. There exists an expected virtue of ignorance, and secrecy constitutes optimal policy. This result holds when news are about cost-push shocks, or about shocks to the monetary policy objective, or about shocks to the natural rate of interest, and even when the zero lower bound of ...