Expectations, Learning and Monetary Policy: An Overview of Recent Research

Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents’ learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.

Scotland: A New Fiscal Settlement

Executive Summary Many commentators have criticised the strategy currently used to finance the Scottish Parliament – both the block grant system, and the small degree of fiscal autonomy devised in the Calman report and the UK government’s 2009 White Paper. Nevertheless, fiscal autonomy has now been conceded in principle. This paper sets out to identify formally what level of autonomy would be best for the Scottish economy and the institutional changes needed to support that arrangement. Our conclusions are in line with the Steel Commission: that significantly more fiscal powers need to be transferred to Scotland. But what we can then do, which the Steel Commission could not, is to give a detailed blueprint for how this proposal might be implemented in practice. We face two problems. The existing block grant system can and has been criticised from such a wide variety of points of view that it effectively has no credibility left. On the other hand, the Calman proposals (and the UK government proposals that followed) are unworkable because, to function, they require information that the policy makers cannot possibly have; and because, without borrowing for current activities, they contain no mechanism to reconcile contractual spending (most of the budget) with variable revenue flows – which is to invite an eventual breakdown. But in its attempt to fix these problems, the UK White Paper introduces three further difficulties: new grounds for quarrels between the UK and Scottish governments, a long term deflation bias, and a loss of devolution.

The Stagnation Regime of the New Keynesian Model and Current US Policy

In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed.

Total aortic arch stenting--hemodynamical impact of carotid artery perfusion.

The aim of this experimental study is to evaluate the feasibility and the outcome of total endovascular stent implantation in the aortic arch. Indications for this operation-technique would be acute or chronic dissection of the aortic arch (non-A-non-B dissection) or type B dissection with retrograde extension. Four pigs were canulated via the distal abdominal aorta and a retrograde placement of a Djumbodis arch stent (4-9 cm) was controlled by using intravascular ultrasound and intracardiac ultrasound by the inferior cava vein and under radioscopic control. Cerebral perfusion, by using a flow meter placed on one prepared carotid artery, were controlled before, immediate post-procedural (<1 min), and in the early follow-up after aortic arch stent implantation. During the implantation process, especially during balloon inflation and deflation, mean carotid perfusion decreases slightly. A reactive increase of carotid perfusion after stent placements indicates transitory cerebral hypo-perfusion. Non-covered aortic arch stent implantation is technically feasible and could be a potential treatment option in otherwise inoperable arch dissections. The time required for balloon inflation and deflation causes an important risk of cerebral ischemia. The latter can be reduced by transaxillary perfusion.

Japan's lost decade: Does money have a role?

We study the contribution of the stock of money to the macroeconomic outcomesof the 1990s in Japan using a small scale structural model. Likelihood-basedestimates of the parameters are provided and time stabilities of the structural relationshipsanalyzed. Real balances are statistically important for output and inflationfluctuations and their role has changed over time. Models which give moneyno role give a distorted representation of the sources of cyclical fluctuations. Thesevere stagnation and the long deflation are driven by different causes.

Inflationary expectations during Germany's great slump

Was the German slump inevitable? This paper argues that -despite thespeed and depth of Germany's deflation in the early 1930s - fear ofinflation is evident in the bond, foreign exchange, and commodity marketsat certain critical junctures of the Great Depression. Therefore, policyoptions were more limited than many subsequent critics of Brüning'spolicies have been prepared to admit. Using a rational expectationsframework, we find strong evidence from the bondmarket to suggest fearof inflation. Futures prices also reveal that market participants werebetting on price increases. These findings are discussed in the contextof reparations and related to the need for a regime shift to overcomethe crisis.

International debt deleveraging

I provide a framework for understanding debt deleveraging in a group of financiallyintegrated countries. During an episode of international deleveraging world consumptiondemand is depressed and the world interest rate is low, reflecting a high propensity to save.If exchange rates are allowed to float, deleveraging countries can depreciate their nominalexchange rate to increase production and mitigate the fall in consumption associatedwith debt reduction. The key insight of the paper is that in a monetary union thischannel of adjustment is shut off, and therefore the falls in consumption demand and inthe world interest rate are amplified. Hence, monetary unions are especially prone tohit the zero lower bound on the nominal interest rate and enter a liquidity trap duringdeleveraging. In a liquidity trap deleveraging gives rise to a union-wide recession, which isparticularly severe in high-debt countries. The model suggests several policy interventionsthat mitigate the negative impact of deleveraging on output in monetary unions.

Arterial blood pressure of term newborns during the first week of life

The progressive behavior of the blood pressure of term newborns during the first week of life was assessed by the simultaneous use of oscillometric and Doppler methods. A total of 174 term neonates born at the Municipal Hospital Odilon Behrens in Belo Horizonte, from March 1996 to February 1997, were prospectively assessed. The oscillometric and Doppler ultrasonic methods were simultaneously used for four consecutive recordings obtained at 12 ± 6, 24 ± 6 and 72 ± 24 h and on the 7th ± 1 day of life. The combined use of the two methods simplified the procedure, with automatic cuff inflation and deflation, and speed was properly controlled with an automatic pressure monitor. The procedure was performed using a Y-connection to the mercury sphygmomanometer, with blood pressure being recorded with an automatic device and systolic blood pressure being measured simultaneously by Doppler ultrasound. The newborns were awake, not crying and in the supine position. A statistically significant increase in systolic and diastolic blood pressure was observed between the first and second, and the third and fourth measurements by Doppler and oscillometric methods. No significant correlation between birth weight, length, ponderal index and blood pressure was observed. The technique used represents a simpler and more accurate procedure for blood pressure measurement.

Inflação e deflação de ativos a partir do mercado imobiliário americano

This paper deals with the financial crisis triggered after the default of subprime mortgages in the United States which expanded to a global systemic crisis. It is divided into a brief introduction and three sections. The first section sums up the dynamics of inflation and deflation of real estate and financial assets which characterizes finance-led cycles. The second section covers major effect of financial assets deflation on the American and European banks. The third section focuses on measures implemented by central banks in order to manage this financial crisis.

The effects of the global economic crisis in Latin America

The aim of this article is to analyze the current phase of the global crisis and the way it has manifested itself in Latin America. The global crisis is the most important capitalist crisis since World War II. It is a new type of debt-deflation crisis, highlighting the limits of the finance-dominated regime of accumulation and characterized by securitization. Latin American countries have not been immune to the global crisis. Since it sets limits on globalization, the impossibility of maintaining export-driven accumulation sustained by restrictive monetary and fiscal policies becomes clear. This time, there will be no way out in external markets for any country. That fact will force them to restructure productive systems and search for a way out in domestic markets and in regional spaces for integration.

The new international financial crisis: causes, consequences and perspectives

The paper investigates the recent financial crisis within a historical and comparative perspective having in mind that it is ultimately a confidence crisis, initially associated to a chain of high risk loans and financial innovations that spread thorough the international system culminating with impressive wealth losses. The financial market will eventually recover from the crisis but the outcome should be followed by a different and more disciplined set of international institutions. There will be a change on how we perceive the widespread liberal argument that the market is always efficient, or at least, more efficient than any State intervention, overcoming the false perception that the State is in opposition to the market. A deep financial crisis brings out a period of wealth losses and an adjustment process characterized by price corrections (commodities and equity price deflation) and real effects (recession and lower employment), and a period of turbulences and end of illusions is in place.

Conservadorismo e rigidez na política monetária: uma estimativa da função de reação do BCB (2000-2007)

This paper aims at evaluating the conduction of monetary policy after the adoption of inflation targeting. Formation of Selic rate is modeled by estimating a reaction function of the BCB. Results show an excessive degree of interest rate smoothing and a high level of equilibrium interest rate. This evidence supports the belief that Selic rate's formation is ruled by a conservative behavior. The conservative conduction of monetary policy is related to two distinct features of BCB's reaction function: i) the great weight of autoregressive components; and, chiefly, ii) a very high level of the equilibrium interest rate. The main conclusion is that, all remaining unchanged, the interest rate would hardly be reduced in a satisfactory way. Massive and chronic deflation would be needed if Selic were to reach a reasonable level, closer to that of rates in the rest of the world. This evidences the need for a debate on the adequacy of current stabilization strategy.

Pollen and grain size records in abyssal sediments of the northwest Pacific Ocean as proxies of Plio-Pleistocene climate change /

A distinctive period of global change occurred during the PUocene between the warm Miocene and subsequent Quaternary cooling. Samples from Ocean Drilling Project Site 11 79 (-5586 mbsl, 41°4'N, 159°57'E), Site 881 (-5765 mbsl, 47°6.133'N, 161°29.490'E) and Site 882 (-3255 mbsl, 50°22'N, 167°36'E) were studied to determine the magnitude and composition ofterrigenous flux to the western mid-latitude North Pacific and its relation to climate change in East Asia since the mid-Pliocene. Dust-sized particles (including pollen), sourced from the arid regions and loess plateaus in East Asia are entrained by prevailing westerly winds and transported to the midlatitude northwest North Pacific Ocean. This is recorded by peaks in the total concentration of pollen and spores, as well as the mean grain size of allochthonous and autochthonous silicate material in abyssal marine sediments. Aridification of the Asian interior due to the phased uplift of the Himalayan-Tibetan Plateau created the modem East Asian Monsoon system dominated by a strengthening of the winter monsoon. The winter monsoon is further enhanced during glacials due to the expansion of desert and steppe environments at the expense ofwoodlands and forests recorded by the composition of palynological assemblages. The late Pliocene-Pleistocene glacials at ODP Sites 1 179, 881, and 882 are characterized by increases in grain size, magnetic susceptibility, pollen and spore concentrations around 3.5-3.3, 2.6-2.4, 1.7-1.6, and 0.9-0.7 Ma (ages based on magnetostratigraphic and biostratigraphic datums). The peaks during these times are relatively rich in pollen taxa derived primarily from steppe and boreal vegetation zones, recording cool, dry climates. The overall size increase of sediment and abundance of terrestrial palynomorphs record enhanced wind strength. The increase in magnitude of pollen and spore concentrations as well as grain size record global cooling and Northern Hemisphere glaciation. The peaks in grain size as well as pollen and spore abundance in marine sediments correlate with the mean grain size of loess in East Asia, consistent with the deflation of unarmoured surfaces during glacials. The transport of limiting nutrients to marine environments enhanced sea surface productivity and increased the rate of sediment accumulation.

Heterodox Inflation Stabilization in Argentina, Brazil, and Israel. A Historical Review and Some Stylized Facts

This article presents a review of the stabilization attempts in Argentina, Brazil, and Israel during the 1980’s. Earlier research is summarized and complemented with additional sources of contemporaneous information and a detailed analysis of institutional features. The examination of these episodes underscores the strong economic and empirical relationship between the governments’ fiscal policy and the rate of inflation.

Credibility and Signaling in Disinflation- a Cross Country Examination

This paper develops a model of money demand where the opportunity cost of holding money is subject to regime changes. The regimes are fully characterized by the mean and variance of inflation and are assumed to be the result of alternative government policies. Agents are unable to directly observe whether government actions are indeed consistent with the inflation rate targeted as part of a stabilization program but can construct probability inferences on the basis of available observations of inflation and money growth. Government announcements are assumed to provide agents with additional, possibly truthful information regarding the regime. This specification is estimated and tested using data from the Israeli and Argentine high inflation periods. Results indicate the successful stabilization program implemented in Israel in July 1985 was more credible than either the earlier Israeli attempt in November 1984 or the Argentine programs. Government’s signaling might substantially simplify the inference problem and increase the speed of learning on the part of the agents. However, under certain conditions, it might increase the volatility of inflation. After the introduction of an inflation stabilization plan, the welfare gains from a temporary increase in real balances might be high enough to induce agents to raise their real balances in the short-term, even if they are uncertain about the nature of government policy and the eventual outcome of the stabilization attempt. Statistically, the model restrictions cannot be rejected at the 1% significance level.