Fiscal policy, pricing frictions and monetary accommodation

We investigate the theoretical conditions for effectiveness of government consumptionexpenditure expansions using US, Euro area and UK data. Fiscal expansions taking placewhen monetary policy is accommodative lead to large output multipliers in normal times.The 2009-2010 packages need not produce significant output multipliers, may havemoderate debt effects, and only generate temporary inflation. Expenditure expansionsaccompanied by deficit/debt consolidations schemes may lead to short run output gains buttheir success depends on how monetary policy and expectations behave. Trade opennessand the cyclicality of the labor wedge explain cross-country differences in the magnitude ofthe multipliers.

Identifying monetary policy shocks in Japan

It is sometimes argued that the central banks influence the private economy in the short run through controlling a specific component of high powered money, not its total amount. Using a structural VAR approach, this paper evaluates this claim empirically, in the context of the Japanese economy. I estimate a model based on the standard view that the central bank controls the total amount of high powered money, and another model based on the alternative view that it controls only a specific component. It is shown that the former yields much more sensible estimates than thelatter.

Spanish monetary policy: A structural VAR analysis

Some past studies analyzed Spanish monetary policy with the standard VAR. Their problem is that this method obliges researchers to impose a certain extreme form of the short run policy rule on their models. Hence, it does not allow researchers to study the possibility of structural changes in this rule, either. This paper overcomes these problems by using the structural VAR. I find that the rule has always been that of partial accommodation. Prior to 1984, it was quite close to money targeting. After 1984, it became closer to the interest rate targeting, with more emphasis on the exchange rate.

Adoption of financial technologies: Implications for money demand and monetary policy

In this paper we argue that inventory models are probably not usefulmodels of household money demand because the majority of households does nothold any interest bearing assets. The relevant decision for most people is notthe fraction of assets to be held in interest bearing form, but whether to holdany of such assets at all. The implications of this realization are interesting and important. We find that(a) the elasticity of money demand is very small when the interest rate is small,(b) the probability that a household holds any amount of interest bearing assetsis positively related to the level of financial assets, and (c) the cost ofadopting financial technologies is positively related to age and negatively relatedto the level of education. Unlike the traditional methods of money demand estimation, our methodology allowsfor the estimation of the interest--elasticity at low values of the nominalinterest rate. The finding that the elasticity is very small for interest ratesbelow 5 percent suggests that the welfare costs of inflation are small. At interest rates of 6 percent, the elasticity is close to 0.5. We find thatroughly one half of this elasticity can be attributed to the Baumol--Tobin orintensive margin and half of it can be attributed to the new adopters or extensivemargin. The intensive margin is less important at lower interest rates and moreimportant at higher interest rates.

Monetary policy misspecification in VAR models

We examine the effects of extracting monetary policy disturbances with semi-structural and structural VARs, using data generated bya limited participation model under partial accommodative and feedback rules. We find that, in general, misspecification is substantial: short run coefficients often have wrong signs; impulse responses and variance decompositions give misleadingrepresentations of the dynamics. Explanations for the results and suggestions for macroeconomic practice are provided.

Asymmetric effects of monetary policy in the US: Positive vs. negative or big vs. small?

This paper reconsiders the empirical evidence on the asymmetricoutput effects of monetary policy. Asymmetric effects is a common feature ofmany theoretical models, and there are many different versions of suchasymmetries. We concentrate on the distinctions between positive andnegative money-supply changes, big and small changes in money-supply, andpossible combinations of the two asymmetries. Earlier research has foundempirical evidence in favor of the former of these in US data. Using M1 asthe monetary variable we find evidence in favor of neutrality of big shocksand non-neutrality of small shocks. The results may, however, be affected bystructual instability of M1 demand. Thus, we substitute M1 with the federalfunds rate. In these data we find that only small negative shocks affectreal aggregate activity. The results are interpreted in terms of menu-costmodels.

Labor markets and monetary policy: A new-Keynesian model with unemployement

We construct a utility-based model of fluctuations, with nominal rigidities andunemployment, and draw its implications for the unemployment-inflation trade-off and for the conduct of monetary policy.We proceed in two steps. We first leave nominal rigidities aside. We show that,under a standard utility specification, productivity shocks have no effect onunemployment in the constrained efficient allocation. We then focus on theimplications of alternative real wage setting mechanisms for fluctuations in un-employment. We show the role of labor market frictions and real wage rigiditiesin determining the effects of productivity shocks on unemployment.We then introduce nominal rigidities in the form of staggered price setting byfirms. We derive the relation between inflation and unemployment and discusshow it is influenced by the presence of labor market frictions and real wagerigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.

Structural changes in the US economy: is there a role for monetary policy?

This paper investigates the contribution of monetary policy to the changes in outputgrowth and inflation dynamics in the US. We identify a policy shock and a policy rule ina time-varying coefficients VAR using robust sign restrictions. The transmission of policyshocks has been relatively stable. The variance of the policy shock has decreased over time,but policy shocks account for a small fraction of the level and of the variations in inflationand output growth volatility and persistence. We find little evidence of a significant increasein the long run response of the interest rate to inflation. A more aggressive inflation policyin the 1970s would have produced large output growth costs.

Optimal monetary and fiscal policy in a currency union

We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and study its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the countrylevel, through the choice of government spending. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal cooperative policy arrangement requires that inflation be stabilized at the union level by the common central bank, while fiscal policy is used by each country for stabilization purposes. By contrast, when the fiscal authorities act in a non-coordinated way, their joint actions lead to a suboptimal outcome, and make the common central bank face a trade-off between inflation and output gap stabilization at the union level.

Strategic delegation in monetary unions

In monetary unions, monetary policy is typically made by delegates of the member countries. This procedure raises the possibility of strategic delegation - that countries may choose the types of delegates to influence outcomes in their favor. We show that without commitment in monetary policy, strategic delegation arises if and only if three conditions are met: shocks affecting individual countries are not perfectly correlated, risk-sharing across countries is imperfect, and the Phillips Curve is nonlinear. Moreover, inflation rates are inefficiently high. We argue that ways of solving the commitment problem, including the emphasis on price stability in the agreements constituting the European Union are especially valuable when strategic delegation is a problem.

Monetary unions and the transaction cost savings of a single currency

This paper studies the transaction cost savings of moving froma multi-currency exchange system to a single currency one. Theanalysis concentrates exclusively on the transaction andprecautionary demand for money and abstracts from any othermotives to hold currency. A continuous-time, stochastic Baumol-like model similar to that in Frenkel and Jovanovic (1980) isgeneralized to include several currencies and calibrated to fitEuropean data. The analysis implies an upper bound for thesavings associated with reductions of transaction costs derivedfrom the European Monetary Union of approximately 0.6\% of theCommunity GDP. Additionally, the magnitudes of the brokeragefee and the volatility of transactions, whose estimation hastraditionally been difficult to address empirically, areapproximated for Europe.