Nonlinear Monetary Policy Rules: Some New Evidence for the U.S.

This paper derives optimal monetary policy rules in setups where certainty equivalence does not hold because either central bank preferences are not quadratic, and/or the aggregate supply relation is nonlinear. Analytical results show that these features lead to sign and size asymmetries, and nonlinearities in the policy rule. Reduced-form estimates indicate that US monetary policy can be characterized by a nonlinear policy rule after 1983, but not before 1979. This finding is consistent with the view that the Fed's inflation preferences during the Volcker-Greenspan regime differ considerably from the ones during the Burns-Miller regime.

Durable Goods, Inter-Sectoral Linkages and Monetary Policy

Barsky, House and Kimball (2007) show that introducing durable goods into a sticky-price model leads to negative sectoral comovement of production following a monetary policy shock and, under certain conditions, to aggregate neutrality. These results appear to undermine sticky-price models. In this paper, we show that these results are not robust to two prominent and realistic features of the data, namely input-output interactions and limited mobility of productive inputs. When extended to allow for both features, the sticky-price model with durable goods delivers implications in line with VAR evidence on the effects of monetary policy shocks.

Some Implications of the Zero Lower Bound on Interest Rates for the Term Structure and Monetary Policy

In an economy where cash can be stored costlessly (in nominal terms), the nominal interest rate is bounded below by zero. This paper derives the implications of this nonnegativity constraint for the term structure and shows that it induces a nonlinear and convex relation between short- and long-term interest rates. As a result, the long-term rate responds asymmetrically to changes in the short-term rate, and by less than predicted by a benchmark linear model. In particular, a decrease in the short-term rate leads to a decrease in the long-term rate that is smaller in magnitude than the increase in the long-term rate associated with an increase in the short-term rate of the same size. Up to the extent that monetary policy acts by affecting long-term rates through the term structure, its power is considerably reduced at low interest rates. The empirical predictions of the model are examined using data from Japan.

The Transmission of Monetary Policy in a Multi-Sector Economy

This paper constructs and estimates a sticky-price, Dynamic Stochastic General Equilibrium model with heterogenous production sectors. Sectors differ in price stickiness, capital-adjustment costs and production technology, and use output from each other as material and investment inputs following an Input-Output Matrix and Capital Flow Table that represent the U.S. economy. By relaxing the standard assumption of symmetry, this model allows different sectoral dynamics in response to monetary policy shocks. The model is estimated by Simulated Method of Moments using sectoral and aggregate U.S. time series. Results indicate 1) substantial heterogeneity in price stickiness across sectors, with quantitatively larger differences between services and goods than previously found in micro studies that focus on final goods alone, 2) a strong sensitivity to monetary policy shocks on the part of construction and durable manufacturing, and 3) similar quantitative predictions at the aggregate level by the multi-sector model and a standard model that assumes symmetry across sectors.

The Dynamic (In)efficiency of Monetary Policy by Committee

This paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game. Committee members differ in their institutional power and, in certain states of nature, they also differ in their preferred instrument value. Preference heterogeneity and concern for the future interact to generate decisions that are dynamically ineffcient and inertial around the previously-agreed instrument value. This model endogenously generates autocorrelation in the policy variable and provides an explanation for the empirical observation that the nominal interest rate under the central bank’s control is infrequently adjusted.

Monetary Policy by Committee:Consensus, Chairman Dominance or Simple Majority?

This paper studies the theoretical and empirical implications of monetary policy making by committee under three different voting protocols. The protocols are a consensus model, where super-majority is required for a policy change; an agenda-setting model, where the chairman controls the agenda; and a simple majority model, where policy is determined by the median member. These protocols give preeminence to different aspects of the actual decision making process and capture the observed heterogeneity in formal procedures across central banks. The models are estimated by Maximum Likehood using interest rate decisions by the committees of five central banks, namely the Bank of Canada, the Bank of England, the European Central Bank, the Swedish Riksbank, and the U.S. Federal Reserve. For all central banks, results indicate that the consensus model is statically superior to the alternative models. This suggests that despite institutionnal differences, committees share unwritten rules and informal procedures that deliver observationally equivalent policy decisions.

Monetary Policy When Wages Are Downwardly Rigid: Friedman Meets Tobin

In a monetary economy with downwardly rigid wages, the central banker should target a low, but strictly positive, inflation rate.

Dissent in monetary policy decisions

Voting records indicate that dissents in monetary policy committees are frequent and predictability regressions show that they help forecast future policy decisions. In order to study whether the latter relation is causal, we construct a model of committee decision making and dissent where members' decisions are not a function of past dissents. The model is estimated using voting data from the Bank of England and the Riksbank. Stochastic simulations show that the decision-making frictions in our model help account for the predictive power of current dissents. The effect of insti- tutional characteristics and structural parameters on dissent rates is examined using simulations as well.

A Prudent Central Banker

This paper studies monetary policy in an economy where the central banker's preferences are asymmetric around optimal inflation. In particular, positive deviations from the optimum can be weighted more, or less, severely than negative deviations in the policy maker's loss function. It is shown that under asymmetric preferences, uncertainty can induce a prudent behavior on the part of the central banker. Since the prudence motive can be large enough to override the inflation bias, optimal monetary policy could be implemented even in the absence of rules, reputation, or contractual mechanisms. For certain parameter values, a deflationary bias can arise in equilibrium.

Habit Formation and the Persistence of Monetary Shocks

This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. This paper constructs and estimates a general equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated via Maximum Likelihood using US data on output, the real money stock, and the nominal interest rate. Econometric results suggest that habit formation and adjustment costs to capital play an important role in explaining the output effects of monetary policy. In particular, impulse response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.

Les facteurs declencheurs des crises financieres internationales

Ce rapport s'inscrit dans la problematique soulevée par l'insistance des milieux financiers américains et du Trésor américain à libéraliser et à globaliser les mouvements internationaux de capitaux. Dans cette perspective, il tente de répondre à trois questions, à savoir 1) est-ce que la finance internationale en général et les institutions monétaires et financières nationales et internationales sont sources d'instabilité financière et économique pour les pays? 2) est-il possible d'éviter que les bénéfices découlant de l'accès accru aux marchés internationaux des capitaux soient diminués et même renversés par des crises monétaires et financières internationales et nationales et, comme corollaire, 3) est-ce que le systême actuel des monnaies nationales est dépassé ?