Boom-bust Cycles and Monetary Policy. Lawrence Christiano

Transcription

1 MACRO-LINKAGES, OIL PRICES AND DEFLATION WORKSHOP JANUARY 6 9, 2009 Boom-bust Cycles and Monetary Policy Lawrence Christiano

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3 Boom-bust Cycles and Monetary Policy It has often been argued that there is advanced information about technology shocks. Beaudry-Portier, Michelle Alexopoulos, Jaimovic-Rebelo Rebelo, Christiano-Ilut-Motto- Rostagno In the presence of such advance information, standard monetary policy can create an inefficient boom, followed by a bust. Objective Eti Estimate t a model dlin which hihtechnology shocks are partially anticipated Normal technology shock: a t a a t1 t Shock considered here (J Davis): recent information earlier information a t a a t1 t t1 t2 t3 t4 t5 t6 t7 t8 i Evaluate importance of ti for business cycles i Explore implications of ti for monetary policy. Estimation Results s Outline Excessive optimism and 2000 recession Implications for monetary policy Monetary policy causes economy to over- react to signals...inadvertentlyinadvertently creates boom- bust Model Features (version of CEE) Habit persistence in preferences Investment adjustment costs in change of investment Variable capital utilization Calvo sticky (EHL) wages and prices Non-optimizers: P it P i,t1, W j,t z W j,t1 Probability of not adjusting prices/wages: p, w

4 Observables and Shocks Six observables: output growth, inflation, hours worked, investment growth, consumption growth, T-bill rate. Sample Period: 1984Q1 to 2007Q1 Shock representations markup log f,t f f log f,t1 f f,t discount rate logc,t c logc,t1 c,t efficiency of investment logi,t t I logi,t1 t 1 I,t t at aat1 t 1 t1 2 t2 technology 3 t3 4 t4 5 t5 6 t6 monetary policy M t M M t1 u,t. 7 t7 8 t8 j E t l /4 preference shock c,tl logctl bctl1 L 2 l tl,j 2 Kt Kt S I,t marginal (in-) efficiency of investment It It It1 It Yt 0 1 Yjt 1 f,t dj markup shock f,t, Yj,t zt exp technology shock 1 at Lj,t utkj,t, zt expzt R a log Rt log R t1 1 R R R 1 a log t1 ay 4 log y t M y t Variance Decomposition, Technology Shocks 8 i i variable t i1 ti t t i1 ti i5 consumption growth investment growth output growth log hours inflation interest rate i ti l

5 Estimated technology shock process: log, technology shock a t aat1 recent information t t1 t2 t3 t4 earlier information t5 t6 t7 t Implications for Monetary Policy Estimated monetary policy rule induces overreaction to signal shock Problem: positive signal induces expectation that consumption will be high in the future Ramsey-efficient ( natural ) real rate of interest jumps Under Taylor rule, real rate not allowed to jump, so monetary policy is expansionary Intuition easy to see in Clarida-Gali-Gertler model Centered 5-quarter moving average of shocks Signals 5-8 quarters in past NBER trough Current shock plus most recent Four quarters signals NBER peak The standard New-Keynesian Model at at1 t tp at log, technology rr t rr 1 at t1p (natural (Ramsey) rate) t Ett1 xt t (Calvo pricing equation) (i t t l ti ) xt rt Ett1 rr t E txt1 (intertemporal equation) rt Ett1 xxt (policy rule)

6 Response to signal that technology will expand 1% in period 1 Equilibrium Ramsey Period Period Case Where Signal is False t l logat loght logyt g Case Where Signal is True t , 1.5, x 0.5, 0.82 logat loght logyt Let s see how a signal that turns out to be false works in the full, estimated model. The following slide corrects the hours worked response in the previous slides, which was graphed incorrectly.

7 Policy solution Modify the Taylor rule to include: Natural rate of interest (probably not feasible) Credit growth Stock market Wage inflation instead of price inflation. Explored consequences of adding credit growth and/or stock market by adding Bernanke-Gertler-Gilchrist financial frictions. Why is the Boom-Bust So Big? Most of boom-bust reflects suboptimality of monetary policy. What s the problem? Monetary policy ought to respond to the natural (Ramsey) rate of interest. Relatively sticky wages and inflation targeting exacerbate the problem Conclusion Estimated a model in which agents receive advance information about technology shocks. Advance information seems to play an important role in business cycle dynamics Important in variance decompositions Boom-bust of late 1990s seems to correspond to a period in which there was a lot of initial optimism about technology, which later came to be seen as excessive Monetary policy appears to be overly expansionary in response to signal shocks Ramsey-efficient allocations require sharp rise in rate of interest, which `standard monetary policy does not deliver. Problem is most severe when wages are sticky relative to prices.