Firm-specific investment, sticky prices and the Taylor principle

According to the Taylor principle a central bank should adjust the nominal interest rate by more than one-for-one in response to changes in current inflation. Most of the existing literature supports the view that by following this simple recommendation a central bank can avoid being a source of unnecessary fluctuations in economic activity. The present paper shows that this conclusion is not robust with respect to the modelling of capital accumulation. We use our insights to discuss the desirability of alternative interest raterules. Our results suggest a reinterpretation of monetary policy under Volcker and Greenspan: The empirically plausible characterization of monetary policy can explain the stabilization of macroeconomic outcomes observed in the early eighties for the US economy. The Taylor principle in itself cannot.

What explains the Great Moderation in the US? A structural analysis

This paper investigates what has caused output and inflation volatility to fall in the USusing a small scale structural model using Bayesian techniques and rolling samples. Thereare instabilities in the posterior of the parameters describing the private sector, the policyrule and the standard deviation of the shocks. Results are robust to the specification ofthe policy rule. Changes in the parameters describing the private sector are the largest,but those of the policy rule and the covariance matrix of the shocks explain the changes most.

Does it cost to be virtuous? The macroeconomic effects of fiscal constraints

We study whether and how fiscal restrictions alter the business cycle features of macrovariables for a sample of 48 US states. We also examine the typical transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.

A medium-scale open economy model of Australia

We estimate an open economy dynamic stochastic general equilibrium (DSGE)model of Australia with a number of shocks, frictions and rigidities, matching alarge number of observable time series. We find that both foreign and domesticshocks are important drivers of the Australian business cycle.We also find that theinitial impact on inflation of an increase in demand for Australian commoditiesis negative, due to an improvement in the real exchange rate, though there is apersistent positive effect on inflation that dominates at longer horizons.

The daily market for funds in Europe: Has something changed with the EMU?

This paper presents evidence that the existence of deposit and lending facilities combined with an averaging provision for the reserve requirement are powerful tools to stabilize the overnight rate. We reach this conclusion by comparing the behavior of this rate in Germany before and after thestart of Stage III of the EMU. The analysis of the German experience is useful because it allows us to isolate the effects on the overnight rate of these particular instruments of monetary policy. To show that this outcome is a general conclusion and not a particular result of the German market, we develop a theoretical model of reserve management which isable to reproduce our empirical findings.

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.

Inflation and output dynamics with firm-owned capital

We model firm-owned capital in a stochastic dynamic New-Keynesian generalequilibrium model à la Calvo. We find that this structure impliesequilibrium dynamics which are quantitatively di¤erent from the onesassociated with a benchmark case where households accumulate capital andrent it to firms. Our findings therefore stress the importance ofmodeling an investment decision at the firm level in addition to ameaningful price setting decision. Along the way we argue that the problemof modeling firm-owned capital with Calvo price-setting has not been solvedin a correct way in the previous literature.

Public and private saving and investment

We decompose aggregate saving and investment into its publicand private components and then document a variety of ``stylized facts''associated with saving and investment rates for a sample of15 countries over the period 1975--1989. In order to seewhether these empirical relationships are consistent with aworld of perfect capital mobility we develop a multi--countrymodel with free trade in a riskfree bond and calibrate it tothe fifteen OECD countries. We pay special attential tomodeling the fiscal policy rules. The model performsremarkably well in accounting for a wide variety of timeseries relationships. Nonetheless the model is not able to capture the crosssectional aspect of the data. In particular, the model cannot accountfor both the large cross country correlation between aggregate saving and investmentrates and the very negative cross country relationship between the public andprivate saving minus investment gaps.

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.

Efectos regionales de la política monetaria : implicaciones para los países de la zona euro

De acuerdo con la teoría de las áreas monetàrias óptimas,los shocks asimétricos tienen un papel fundamental en la determinación de los beneficios y los costes derivados del establecimiento de una área monetaria. En este sentido, diferentes estudios recientes señalan una importante reducción del grado de asimetría de los shocks en términos reales a lo largo de los últimos años entre los países europeos como consecuencia de la mayor coordinación de las políticas económicas y de la aproximación de las estructuras productivas. De todas maneras, una de las cuestiones clave en el nuevo entorno económico, y que no ha sido demasiado considerada a la literatura reciente, es el posible papel desestabilitzador de la política monetaria común como consecuencia de las diferencias en los mecanismos de transmisión de la política monetaria en los distintos países y regiones de la Zona Euro. En este trabajo se considera la mencionada cuestión desde un punto de vista teórico y se analiza empíricamente la existencia de diferencias regionales en los efectos de la política monetaria llevada a término en España a lo largo de los últimos años con la finalidad d identificar los principales determinantes de esta asimetría en el ámbito europeo

Efectos regionales de la política monetaria : implicaciones para los países de la zona euro

De acuerdo con la teoría de las áreas monetàrias óptimas,los shocks asimétricos tienen un papel fundamental en la determinación de los beneficios y los costes derivados del establecimiento de una área monetaria. En este sentido, diferentes estudios recientes señalan una importante reducción del grado de asimetría de los shocks en términos reales a lo largo de los últimos años entre los países europeos como consecuencia de la mayor coordinación de las políticas económicas y de la aproximación de las estructuras productivas. De todas maneras, una de las cuestiones clave en el nuevo entorno económico, y que no ha sido demasiado considerada a la literatura reciente, es el posible papel desestabilitzador de la política monetaria común como consecuencia de las diferencias en los mecanismos de transmisión de la política monetaria en los distintos países y regiones de la Zona Euro. En este trabajo se considera la mencionada cuestión desde un punto de vista teórico y se analiza empíricamente la existencia de diferencias regionales en los efectos de la política monetaria llevada a término en España a lo largo de los últimos años con la finalidad d identificar los principales determinantes de esta asimetría en el ámbito europeo

EKP:n rahapolitiikan päätöksenteko ja EU:n itälaajeneminen

Abstract: Monetary policy decision making in the ECB and the EU's Eastern enlargement

The Conservativeness of the Central Bank when Institutional Quality is Poor

We propose an extension of Alesina and Tabellini 's model (1987) to include corruption, which is understood as the presence of weak institutions collecting revenue through formal tax channels. This paper analyses how conservative should an independent central bank be when the institutional quality is poor. When there are no political distortions, we show that the central bank has to be more conservative than the government, except with complete corruption. In this particular case, the central bank should be as conservative as the government. Further, we obtain that the relationship between the optimal relative degree of conservativeness of the central bank and the degree of corruption is affected by supply shocks. Concretely, when these shocks are not important, the central bank should be less conservative if the degree of corruption increases. However, this result may not hold when the shocks are relevant. JEL classi fication: D6, D73, E52, E58, E62, E63. Keywords: Central Bank Conservativeness; Corruption; Fiscal Policy; Monetary Policy; Seigniorage.

Structural macro factors and the affine term structure of interest rates

This work consists of three essays investigating the ability of structural macroeconomic models to price zero coupon U.S. government bonds. 1. A small scale 3 factor DSGE model implying constant term premium is able to provide reasonable a fit for the term structure only at the expense of the persistence parameters of the structural shocks. The test of the structural model against one that has constant but unrestricted prices of risk parameters shows that the exogenous prices of risk-model is only weakly preferred. We provide an MLE based variance-covariance matrix of the Metropolis Proposal Density that improves convergence speeds in MCMC chains. 2. Affine in observable macro-variables, prices of risk specification is excessively flexible and provides term-structure fit without significantly altering the structural parameters. The exogenous component of the SDF is separating the macro part of the model from the term structure and the good term structure fit has as a driving force an extremely volatile SDF and an implied average short rate that is inexplicable. We conclude that the no arbitrage restrictions do not suffice to temper the SDF, thus there is need for more restrictions. We introduce a penalty-function methodology that proves useful in showing that affine prices of risk specifications are able to reconcile stable macro-dynamics with good term structure fit and a plausible SDF. 3. The level factor is reproduced most importantly by the preference shock to which it is strongly and positively related but technology and monetary shocks, with negative loadings, are also contributing to its replication. The slope factor is only related to the monetary policy shocks and it is poorly explained. We find that there are gains in in- and out-of-sample forecast of consumption and inflation if term structure information is used in a time varying hybrid prices of risk setting. In-sample yield forecast are better in models with non-stationary shocks for the period 1982-1988. After this period, time varying market price of risk models provide better in-sample forecasts. For the period 2005-2008, out of sample forecast of consumption and inflation are better if term structure information is incorporated in the DSGE model but yields are better forecasted by a pure macro DSGE model.

Three essays on the determinants of output, inflation and interest rates

Résumé: Output, inflation and interest rates are key macroeconomic variables, in particular for monetary policy. In modern macroeconomic models they are driven by random shocks which feed through the economy in various ways. Models differ in the nature of shocks and their transmission mechanisms. This is the common theme underlying the three essays of this thesis. Each essay takes a different perspective on the subject: First, the thesis shows empirically how different shocks lead to different behavior of interest rates over the business cycle. For commonly analyzed shocks (technology and monetary policy errors), the patterns square with standard models. The big unknown are sources of inflation persistence. Then the thesis presents a theory of monetary policy, when the central bank can better observe structural shocks than the public. The public will then seek to infer the bank's extra knowledge from its policy actions and expectation management becomes a key factor of optimal policy. In a simple New Keynesian model, monetary policy becomes more concerned with inflation persistence than otherwise. Finally, the thesis points to the huge uncertainties involved in estimating the responses to structural shocks with permanent effects.