Monetary Theory and Policy. Fourth Edition. Carl E. Walsh. The MIT Press Cambridge, Massachusetts London, England

Transcription

1 Monetary Theory and Policy Fourth Edition Carl E. Walsh The MIT Press Cambridge, Massachusetts London, England

2 Contents Preface Introduction xiii xvii 1 Evidence on Money, Prices, and Output Introduction Some Basic Correlations Estimating the Effect of Monetary Policy on Output and Inflation The Evidence of Friedman and Schwartz Granger Causality Policy Uses The VAR Approach Structural Econometric Models Alternative Approaches Monetary Policy at Very Low Interest Rates Measuring Policy at the Effective Tower Bound (ELB) The Effects of Quantitative Easing (QE) Policies Summary 40 2 Money-in-the-Utility Function Introduction The Basic MIU Model Steady-State Equilibrium Multiple Equilibria in Monetary Models The Interest Elasticity of Money Demand Limitations The Weifare Cost of Inflation Extensions 66

3 vi Contents Interest on Money Nonsuperneutrality Dynamics in an MIU Model The Decision Problem The Steady State The Linear Approximation Calibration Simulation Results Summary Appendix: Solving the MIU Model The Linear Approximation Collecting all Equations Solving Linear Rational-Expectations Models with Forward-Looking Variables Problems 94 3 Money and Transactions Introduction Resource Costs of Transacting Shopping-Time Models Real Resource Costs Cash-in-Advance (CIA) Models The Certainty Case A Stochastic CIA Model Search Centralized and Decentralized Markets The Weifare Costs of Inflation Summary Appendix: The CIA Approximation The Steady State The Linear Approximation Problems Money and Public Finance Introduction Budget Accounting Intertemporal Budget Balance Money and Fiscal Policy Frameworks Deficits and Inflation 145

4 Contents vii Ricardian and (Traditional) Non-Ricardian Fiscal Policies The Government Budget Constraint and the Nominal Rate oflnterest Equilibrium Seigniorage Cagan's Model Rational Hyperinflation The Fiscal Theory of the Price Level Multiple Equilibria The Basic Idea of the Fiscal Theory Empirical Evidence on the Fiscal Theory Optimal Taxation and Seigniorage A Partial Equilibrium Model Optimal Seigniorage and Temporary Shocks Friedman's Rule Revisited Nonindexed Tax Systems Summary Problems Informational and Portfolio Rigidities Introduction Informational Frictions Imperfect Information The Lucas Model Sticky Information Leaming Limited Participation and Liquidity Effects A Basic Limited-Participation Model Endogenous Market Segmentation Assessment Summary Appendix: An Imperfect-Information Model Problems Discretionary Policy and Time Inconsistency Introduction Inflation under Discretionary Policy Policy Objectives The Economy Equilibrium Inflation 227

5 viii Contents 6.3 Solutions to the Inflation Bias Reputation Preferences Contracts Institutions Targeting Rules Is the Inflation Bias Important? Summary Problems Nominal Price and Wage Rigidities Introduction Sticky Prices and Wages An Example of Nominal Rigidities in General Equilibrium Early Models of Intertemporal Nominal Adjustment Imperfect Competition Time-Dependent Pricing (TOP) Models State-Dependent Pricing (SDP) Models Frictions in the Timing of Price Adjustment or in the Adjustment of Prices? Assessing Alternatives Microeconomic Evidence Evidence on the New Keynesian Phillips Curve Sticky Prices versus Sticky Information Summary Appendix: A Sticky-Wage MIU Model Problems New Keynesian Monetary Economics Introduction The Basic Model Households Firms Market Clearing A Linearized New Keynesian Model The Linearized Phillips Curve The Linearized IS Curve Local Uniqueness of the Equilibrium The Monetary Transmission Mechanism Adding Economic Disturbances 339

6 Contents ix 8.4 Monetary Policy Analysis in New Keynesian Models Policy Objectives Policy Trade-offs Optimal Commitment and Discretion Commitment to a Rule Endogenous Persistence Targeting Regimes and Instrument Rules Model Uncertainty Labor Market Frictions and Unemployment Sticky Wages and Prices Unemployment Summary Appendix The New Keynesian Phillips Curve Approximating Utility Problems Monetary Policy in the Open Economy Introduction A Two-Country Open-Economy Model Households International Consumption Risk Sharing Firms Equilibrium Optimal Policy A Model of the Small Open Economy Households International Risk Sharing and Uncovered Interest Parity Domestic Firms Equilibrium Conditions Monetary Policy in the Linear Model Additional Sources of Nominal Distortions Imperfect Pass-Through Local Currency Pricing Sticky Tradeable and Nontradeable Goods Prices Currency Unions Summary Appendix Problems 449

7 X Contents 10 Financial Markets and Monetary Policy 10.1 Introduction 10.2 Interest Rates and Monetary Policy Interest Rate Rules and the Price Level Interest Rate Policies in General Equilibrium 10.3 The Term Structure of Interest Rates The Basic Expectations Theory Expected Inflation and the Term Structure 10.4 Macroflnance Affine Models of the Term Structure A Preferred Habitat Term Structure Model 10.5 Policy and the Term Structure A Simple Example An Affine Example 10.6 Financial Frictions in Credit Markets Adverse Selection Moral Hazard Monitoring Costs Agency Costs Intermediary-to-Intermediary Credit Flows 10.7 Macroeconomic Implications General Equilibrium Models Agency Costs and General Equilibrium Agency Costs and Sticky Prices 10.8 Summary 10.9 Problems 11 The Effective Lower Bound and Balance Sheet Policies 11.1 Introduction 11.2 The Effective Lower Bound 11.3 Liquidity Traps 11.4 Conventional Policies at the ELB Equilibria at the ELB Analytics at the ELB Commitment and Forward Guidance Summary on the ELB 11.5 Balance Sheet Policies Asset Pricing Wedges Market Segmentation and Transaction Costs

8 Contents xi Costly Intermediation Moral Hazard in Banking Resaleability Constraints Summary on Balance Sheet Policies Appendix: Derivation of die Asset Pricing Wedges Problems Monetary Policy Operating Procedures Introduction From Instruments to Goals The Instrument Choice Problem Poole's Analysis Policy Rules and Information Intermediate Targets Real Effects of Operating Procedures Operating Procedures and Policy Measures Money Multipliers The Reserve Market Interest on Reserves in a Channel System A Brief History of Fed Operating Procedures Other Countries Summary Problems 605 References 609 Name Index 645 Subject Index 651