Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption

While consumption habits have been utilised as a means of generating a humpshaped output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly,external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the stabilising properties of standard simple rules.

Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy

Recent attempts to incorporate optimal fiscal policy into New Keynesian models subject to nominal inertia, have tended to assume that policy makers are benevolent and have access to a commitment technology. A separate literature, on the New Political Economy, has focused on real economies where there is strategic use of policy instruments in a world of political conflict. In this paper we combine these literatures and assume that policy is set in a New Keynesian economy by one of two policy makers facing electoral uncertainty (in terms of infrequent elections and an endogenous voting mechanism). The policy makers generally share the social welfare function, but differ in their preferences over fiscal expenditure (in its size and/or composition). Given the environment, policy shall be realistically constrained to be time-consistent. In a sticky-price economy, such heterogeneity gives rise to the possibility of one policy maker utilising (nominal) debt strategically to tie the hands of the other party, and influence the outcome of any future elections. This can give rise to a deficit bias, implying a sub-optimally high level of steady-state debt, and can also imply a sub-optimal response to shocks. The steady-state distortions and inflation bias this generates, combined with the volatility induced by the electoral cycle in a sticky-price environment, can significantly

Fiscal Sustainability in a New Keynesian Model

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary policy-making. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government’s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy which allows for different probabilities of reneging on past promises. This on-line Appendix extends the results of this paper.

Fiscal Sustainability in a New Keynesian Model

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary policy-making. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government’s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy which allows for different probabilities of reneging on past promises. This on-line Appendix extends the results of this paper.

The Inflation Bias under Calvo and Rotemberg Pricing.

New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used interchangeably since, to a first order of approximation they imply an isomorphic Phillips curve and, if the steady-state is efficient, identical objectives for the policy maker and as a result in an LQ framework, the same policy conclusions. In this paper we compute time-consistent optimal monetary policy in bench-mark New Keynesian models containing each form of price stickiness. Using global solution techniques we find that the inflation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the former typically significant exhibits far greater welfare costs of inflation. The rates of inflation observed under this policy are non-trivial and suggest that the model can comfortably generate the rates of inflation at which the problematic issues highlighted in the trend inflation literature emerge, as well as the movements in trend inflation emphasized in empirical studies of the evolution of inflation. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. The choice of which form of nominal inertia to adopt is not innocuous.

Endogenous time-dependent rules and inflation inertia: preliminary version

When policy rules are changed, the effect of nominal rigidities should be modelled through endogenous pricing rules. We endogenize Taylor (1979) type pricing rule to examine the output effects of monetary disinflations. We derive optimal fixed-price time-dependent rules in inflationary steady states and during disinflations. We also develop a methodology to aggregate individual pricing rules which vary through disinflation. This allows us to reevaluate the output costs of monetary disinflation, including aspects as the role of the initial leveI of inflation and the importance of the degree of credibility of the policy change.

Optimal-state-dependent rules, credibility, and inflationary inertia

This paper examines the output losses caused by disinflation and the role of credibility in a model where pricing mIes are optimal and individual prices are rigid. Individual nominal rigidity is modeled as resulting from menu costs. The interaction between optimal pricing mIes and credibility is essential in determining the inflationary inertia. A continued period of high inflation generates an asymmetric distribution of price deviations, with more prices that are substantially lower than their desired leveIs than prices that are substantially higher than the optimal ones. When disinflation is not credible, inflationary inertia is engendered by this asymmetry: idiosyncratic shocks trigger more upward than downward adjustments. A perfect1y credible disinflation causes an immediate change of pricing rules which, by rendering the price deviation distribution less asymmetric, practically annihilates inflationary inertia. An implication of our model is that stabilization may be sucessful even when credibility is low, provided that it is preceded by a mechanism of price alignment. We also develop an analytical framework for analyzing imperfect credibility cases.

Inertia in two simple problems of soil hydrodynamics

In the present paper the dynamic solutions of two non-steady seepage problems are discussed. It is shown that the acceleration term in the equation of motion is important for a correct qualitative description of the flow.

Analytical solution to the zero-inertia problem for surge flow phenomena in nonprismatic channels

Surge flow phenomena. e.g.. as a consequence of a dam failure or a flash flood, represent free boundary problems. ne extending computational domain together with the discontinuities involved renders their numerical solution a cumbersome procedure. This contribution proposes an analytical solution to the problem, It is based on the slightly modified zero-inertia (ZI) differential equations for nonprismatic channels and uses exclusively physical parameters. Employing the concept of a momentum-representative cross section of the moving water body together with a specific relationship for describing the cross sectional geometry leads, after considerable mathematical calculus. to the analytical solution. The hydrodynamic analytical model is free of numerical troubles, easy to run, computationally efficient. and fully satisfies the law of volume conservation. In a first test series, the hydrodynamic analytical ZI model compares very favorably with a full hydrodynamic numerical model in respect to published results of surge flow simulations in different types of prismatic channels. In order to extend these considerations to natural rivers, the accuracy of the analytical model in describing an irregular cross section is investigated and tested successfully. A sensitivity and error analysis reveals the important impact of the hydraulic radius on the velocity of the surge, and this underlines the importance of an adequate description of the topography, The new approach is finally applied to simulate a surge propagating down the irregularly shaped Isar Valley in the Bavarian Alps after a hypothetical dam failure. The straightforward and fully stable computation of the flood hydrograph along the Isar Valley clearly reflects the impact of the strongly varying topographic characteristics on the How phenomenon. Apart from treating surge flow phenomena as a whole, the analytical solution also offers a rigorous alternative to both (a) the approximate Whitham solution, for generating initial values, and (b) the rough volume balance techniques used to model the wave tip in numerical surge flow computations.

The economic determinants of the Brazilian nominal term structure of interest rates

The purpose of this study is to identify the effects of monetary policy and macroeconomic shocks on the dynamics of the Brazilian term structure of interest rates. We estimate a near-VAR model under the identification scheme proposed by Christiano et al. (1996, 1999). The results resemble those of the US economy: monetary policy shocks that flatten the term structure of interest rates. We find that monetary policy shocks in Brazil explain a significantly larger share of the dynamics of the term structure than in the USA. Finally, we analyse the importance of standard macroeconomic variables (e. g. GDP, inflation and measure of country risk) to the dynamics of the term structure in Brazil.

Nominal versus indexed debt: A quantitative horse race

The main arguments in favor and against nominal and indexed debts are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries. (C) 2010 Elsevier Ltd. All rights reserved.

A concordância nominal de número no português falado na zona rural de Santa Leopoldina/ES

Esta pesquisa dedica-se a analisar o processo de concordância nominal no português falado na zona rural de Santa Leopoldina/ES. Para isso, utilizaremos, como base para nossas ponderações, os pressupostos da Sociolinguística Variacionista. Nossa análise foi constituída a partir de entrevistas, tipicamente labovianas, com duração de 50 a 60 minutos. Sabendo que a Teoria da Variação considera preponderante o estudo da língua associado ao meio em que essa se encontra inserida, nos termos de Labov (2008 [1972], p. 291), estratificamos nossos informantes da seguinte maneira: faixa etária – 7-14 anos; 15-25 anos; 26-49 anos; e maiores de 49 anos; sexo/gênero – feminino e masculino; escolaridade – um a cinco anos (antigo primário, atual fundamental 1); seis a nove anos (antigo ginasial, atual fundamental 2). Para um controle do ambiente linguístico em que nossas variantes operam, selecionamos cinco variáveis linguísticas: saliência fônica, posição linear e relativa aliada à classe gramatical, marcas precedentes, animacidade dos substantivos, grau e formalidade dos substantivos e dos adjetivos. Além disso, elaboramos um estudo comparativo entre rural vs urbano, haja vista que comparamos nossos resultados aos obtidos por: Scherre (1988) – com o português falado no Rio de Janeiro (RJ), na década de 1980; Scherre e Naro (2006) – com o português falado no Rio de Janeiro (RJ), na década de 2000; e, por fim, Silva (2011) – com o português falado em Vitória (ES), na década de 2000. Esperamos, dessa forma, colaborar para o mapeamento da fala capixaba.