Macroeconomic modeling for monetary policy evaluation

We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation ofmacro models, and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: the significant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.

Endogenous business cycles and stabilization policies

The paper reports results on the effects of stylized stabilization policies on endogenously created fluctuations. A simple monetary model with intertemporally optimizing agents is considered. Fluctuations in output may occur due to fluctuations in labor supply which are again caused by volatile expectations which are ``self fulfilling'', i.e. correct given the model. It turns out that stabilization policies that are sufficiently countercyclical in the sense that government spending (on transfers or demand) depends sufficiently strongly negatively on GNP-increases can stabilize the economy at a monetary steadystate for an arbitrarily low degree of distortion of that steady state. Such stabilization has unambiguously good welfare effects and can be achieved without features such as positive lump sum taxation or negative income taxation as part of the stabilization policy.

On the sources of the Great Moderation

The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidencepoints to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behindthe observed changes.

On the timing of balance of payments crises: Disaggregated information and interest rate policy

This paper proposes a dynamic framework to study the timing of balance of paymentscrises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be eective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

Fiat money, intrinsic properties and government transaction policy

Why do people coordinate on the use of valueless piecesof paper as generally accepted money? A possible answeris that these objects have intrinsic properties that make them better candidates to be used as media of exchange. Another answer stresses the fact that unconvertible fiat money will not easily appear unless there is a centralized institution that favors its use.The main objective of the paper is to analyze these questions. In order to do this, we take a model of commodity money in which fiat money does not play any significant role and modify it to examine under which circumstances fiat money might come to circulate as medium of exchange. Some of the results obtained from the model differ in a rather substantial way from previous related literature.

The new Keynesian approach to monetary policy analysis: Lessons and new directions

I discuss several lessons regarding the design and conduct of monetary policy that have emerged out of the New Keynesian research program. Those lessons include the bene.ts of price stability, the gains from commitment about future policies, the importance of nat-ural variables as benchmarks for policy, and the bene.ts of a credible anti-inflationary stance. I also point to one challenge facing NK modelling efforts: the need to come up with relevant sources of policy tradeoffs. A potentially useful approach to meeting that challenge, based on the introduction of real imperfections, is presented.

The impact of Economics on health policy and management in Spain

BackgroundDespite the intrinsic value of scientific disciplines, such as Economics, it is appropriate to gauge the impact of its applications on social welfare, or at least Health Economics (HE) case- its influence on health policy and management.MethodsThe three relevant features of knowledge (production, diffusion and application) are analyzed, more from an emic perspective the one used in Anthropology relying on the experience of the members of a culture- than from an etic approach seated on material descriptions and dubious statistics.ResultsThe soundness of the principles and results of HE depends on its disciplinary foundations,whereas its relevance than does not imply translation into practice- is more linked with the problems studied. Important contributions from Economics to the health sphere are recorded.HE in Spain ranks seventh in the world despite the relatively minor HE contents of its clinical and health services research journals.HE has in Spain more presence than influence, having failed to impregnate sufficiently thedaily events.ConclusionsHE knowledge required by a politician, a health manager or a clinician is rather limited; the main impact of HE could be to develop their intuition and awareness.

The science of monetary policy: A new Keynesian perspective

This paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baselinetheoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. Wealso characterize the gains from making credible commitments to fightinflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even in the central bank is not trying toinadvisedly push output above its natural level. We also consider theimplications of frictions such as imperfect information.

Bank liquidity, interbank markets and monetary policy

A major lesson of the recent financial crisis is that the interbank lending marketis crucial for banks facing large uncertainty regarding their liquidity needs. Thispaper studies the efficiency of the interbank lending market in allocating funds. Weconsider two different types of liquidity shocks leading to different implications foroptimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held amongbanks, the central bank should lower the interbank rate. This view implies that thetraditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregateliquidity crisis, central banks should manage the aggregate volume of liquidity. Twodifferent instruments, interest rates and liquidity injection, are therefore required tocope with the two different types of liquidity shocks. Finally, we show that failureto cut interest rates during a crisis erodes financial stability by increasing the riskof bank runs.

Nominal debt as a burden on monetary policy

We study the effects of nominal debt on the optimal sequential choice of monetary policy. When the stock of debt is nominal, the incentive to generate unanticipated inflation increases the cost of the outstanding debt even if no unanticipated inflation episodes occur in equilibrium. Without full commitment, the optimal sequential policy is to deplete the outstanding stock of debt progressively until these extra costs disappear. Nominal debt is therefore a burden on monetary policy, not only because it must be serviced, but also because it creates a time inconsistency problem that distorts interest rates. The introduction of alternative forms of taxation may lessen this burden, if there is enough commtiment to fiscal policy. If there is full commitment to an optimal fiscal policy, then the resulting monetary policy is the Friedman rule of zero nominal interest rates.

Monetary policy and unemployment

Much recent research has focused on the development and analysisof extensions of the New Keynesian framework that model labor marketfrictions and unemployment explicitly. The present paper describessome of the essential ingredients and properties of those models, andtheir implications for monetary policy.

The macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s?

We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. Weconclude that all four have played an important role.

Immigration policy with partisan parties

This paper analyzes the political economy of immigration when the salient electoralissue is the level of immigrants and the relevant immigration policy is the expenditurein immigration control. We consider that immigration affects voters? welfarethrough economic and non economic factors. We model political competition `a laWittman with the ideology of parties endogenously determined at equilibrium. Atequilibrium, parties propose different levels of immigration, located to the left and tothe right of the median voter?s ideal point, and combine skilled and unskilled workersamong their constituencies. Numerical simulations provide the levels of immigrationproposed by the two parties and the composition of parties? constituencies as we varythe efficacy of immigration control and the intensity of immigration aversion.

Is bank debt special for the transmission of monetary policy? Evidence from the stock market

We combine existing balance sheet and stock market data with two new datasets to studywhether, how much, and why bank lending to firms matters for the transmission of monetarypolicy. The first new dataset enables us to quantify the bank dependence of firms precisely,as the ratio of bank debt to total assets. We show that a two standard deviation increase inthe bank dependence of a firm makes its stock price about 25% more responsive to monetarypolicy shocks. We explore the channels through which this effect occurs, and find that thestock prices of bank-dependent firms that borrow from financially weaker banks display astronger sensitivity to monetary policy shocks. This finding is consistent with the banklending channel, a theory according to which the strength of bank balance sheets mattersfor monetary policy transmission. We construct a new database of hedging activities andshow that the stock prices of bank-dependent firms that hedge against interest rate riskdisplay a lower sensitivity to monetary policy shocks. This finding is consistent with aninterest rate pass-through channel that operates via the direct transmission of policy ratesto lending rates associated with the widespread use of floating-rates in bank loans and creditline agreements.

Monetary policy and rational asset price bubbles

I examine the impact of alternative monetary policy rules on arational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interestrates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. Theoptimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper'smain findings call into question the theoretical foundations of the casefor "leaning against the wind" monetary policies.