Monetary policy in a liquidity trap for an open economy
|
|
- Claribel Edwards
- 5 years ago
- Views:
Transcription
1 Eco 553, Part 2, Spring o4.tex Lars Svensson 4/7/02 Monetary policy in a liquidity trap for an open economy The zero bound (floor), i t 0 Liquidity trap, real balances in excess of satiation level Satiation level m(c), P E t s=t U(C s,m s ) U C (C, m) > 0, U CC (C, m) < 0 ½ > 0 for m< m(c) U m (C, m) =0 for m m(c) ½ < 0 for m< m(c) U mm (C, m) =0 for m> m(c) U(C, m) =U(C, m) for m m(c) m(c) min m {m 0 U m (C, m) =0} U Cm (C, m) =0for m> m(c) 0 Copyright 2002 by Lars E.O. Svensson. This document may be reproduced for educational and research purposes, as long as the copies contain this notice and are retained for personal use or distributed free. 1 Money demand i t > 0: U m(c,m) U C (C,m) = i t =0: m m(c) Private sector budget constraint i t > 0, m t < m(c t ): i 1+i, m = g(c, i), lim i 0 g(c, i) = m(c) P t C t + M t i t B t + P t 1 1+r t b t = P t Y t P t T t + M t 1 + B t 1 + P t b t 1 i t =0, m t m(c t ): P t C t +(M t + B t )+P t 1 1+r t b t = P t Y t P t T t +(M t 1 + B t 1 )+P t b t 1 Nominal bonds and money perfect substitutes when i t =0, m t m(c t ) 2
2 Binding zero bound: Suppose i t =0.Thenr t = i t π t+1 t = π t+1 t. Suppose optimal monetary policy requires a lower r t (for instance, because of r t low, other shocks) Liquidity trap: Increasing M t (by open-market operations, reducing B t ) has no real or nominal effect Deflationary spiral Simple backward-looking PF model = π t + αx t x t = σ(i t π t+1 r t ) X L t = E t δ τ 1 2 (π2 t + λx 2 t) π t+1 Suppose π t = π t+1 t = x t = r t = i t =0for t<0 Suppose surprise, r t = ε<0 for 0 t T Without zero bound, optimal response i t = r t = ε, π t = π t+1 t = x t =0for τ 0 With zero bound, i t =0, 0 >x 1 = σε > x 2 >x 3 >..., 0 >π 2 = ασε > π 3... Buiter and Panigirtzoglou 99 τ=0 3 How to lower r t when i t =0 Increase π t+1 t Flexible prices Given p t+1 t, p t,fullemployment,π t+1 t = p t+1 t p t Sticky prices, p t sticky, unemployment Krugman (Posen): p t+1 t, announce positive inflation target, π > 0 (Krugman: 4%/yr for 15 years; Posen: 3%/yr first, 2%/yr after a few years) In future (t +1), out of liquidity trap, P t+1 M t+1 Promise high money growth ( to be irresponsible ), high M t+1 t, P t+1 t /P t, π t+1 t Problem: Why credible? CB renege? Why private sector believe? 4
3 4. How to handle the zero bound? How to avoid falling into a liquidity trap? How to escape from a liquidity trap? Fiscal policy (Ricardian equivalence?) Positive inflation target, credibility (Sweden) (Orphanides and Wieland, Krugman) Alternative instruments/intermediate targets Expanding the monetary base ( quantitative easing ) (Meltzer) Exchange-rate depreciation through FX interventions (buying foreign TBs) (McCallum, Bernanke 00) McKinnon: Permanent bilateral peg Reduce long bond rates by buying long government bonds Increasing asset prices by buying stocks and/or property Achieve negative interest rate by taxing money (Gesell 1949, Buiter and Panigirtzoglou 99, Goodfriend 00) The foolproof way (Svensson) Price-level target path (undo price-gap, get to positive inflation rate, avoid run-away inflation) Devaluation, temporary exchange-rate peg to jump-start economy (feasible to defend strong currency at low value) 5 The Foolproof Way of Escaping from a Liquidity Trap: Intro The zero bound, liquidity traps, Japan The foolproof way Price-level target path Depreciation and temporary exchange-rate peg Alternative proposals Is it really foolproof? Technical problems Political problems (Japan) 6
4 The zero bound, liquidity traps and Japan The zero bound, i t 0 Desired reduction in interest rate prevented Liquidity trap, i t =0 Liquidity saturation Money and TBs (close to) perfect substitutes Japan (Bernanke, Krugman, Posen) m t m t A lost decade Continued stagnation, deflation Zero interest rate, deflation, negative real interest rate, recession, output < potential output, high unemployment, expansionary fiscal policy, big budget deficit, high public debt Objective for macro policy: Escape from liquidity trap and recession, jump-start economy, get to small positive inflation rate, eliminate output gap and unemployment gap Objective for micro policy: Reforms, financial-sector clean-up (easier when out of recession). 7 The foolproof way of escaping from a liquidity trap 1. Price-level target path Best nominal anchor Undo price gap Provides exit strategy 2. Depreciation and temporary exchange-rate peg Jump-start economy: Increase output, price-level Real depreciation Lower real interest rate Induce inflation expectations 8
5 More specifically: 1. Announce an upward-sloping price-level target path {ˆp t } t=t 0 for the (log) domestic price level. ˆp t =ˆp t0 +ˆπ(t t 0 ), t t 0 (1) Current price-level target exceeds current price level ( price gap to undo) ˆp t0 >p t0 (2) Small positive long-run inflation target (1 2%/yr) ˆπ >0 9 2a. Announce devaluation and temporary peg Exchange-rate target (crawling peg, constant peg if ˆπ π ) s t = s t, t t 0 (3) s t s t0 +(ˆπ π )(t t 0 ), t t 0 (4) Choose initial devaluation to achieve initial real depreciation relative to steady state Real exchange rate q t p t + s t p t qt0 p t 0 + s t0 p t0 >q (5) 10
6 2b. Announce that, when price-level target path has been reached, the peg will be abandoned, in favor of flexible price-level targeting (FPT) with loss function (x t y t y t output gap) or flexible inflation-targeting (FIT) X E t τ=0 δ τ L t+τ L t = 1 2 [(p t ˆp t ) 2 + λx 2 t] (6) L t = 1 2 [(π t ˆπ) 2 + λx 2 t] (7) Then, just do it. 12
7 Transmission mechanism in open economy (Svensson 00b) Aggregate supply (Phillips curve) Inflation expectations Output gap Domestic inflation Real exchange rate Aggregate demand ¾ Long real interest rate Output gap Real exchange rate Expectations hypothesis Expected future short nominal interest rates Expected future inflation Real uncovered interest parity ¾ Long real rate 13 Why would this work? Devaluation and peg technically feasible Excess demand for domestic currency Once peg demonstrated, it will be credible s t+1 t = s t+1 Uncovered interest-rate parity Nominal interest rate increases i t = i t + s t+1 t s t + ϕ t (8) Already escaped from liquidity trap Tighter monetary policy? i t = i t +ˆπ π + ϕ t > 0 14
8 Details on establishing the peg 1. Before the peg, t t 0 i t0 =0 s t0 +1 t 0 s t0 = i t0 i t 0 ϕ t0 = i t 0 ϕ t0 < 0 (ϕ t relatively small) 2. Initial lack of credibility of the peg, t = t 0 s t0 = s t0 >s t0 s t0 +1 t 0 = s t0 +1 t 0 i t0 =0 s t0 +1 t 0 s t0 + i t 0 < ϕ t0 Expected (one-period domestic-currency) return on foreign bonds less than return on domestic bonds Excess demand for domestic currency CB sells domestic currency at rate s t0,gainsfxreserves Arbitrage ensures s t0 = s t Credible peg, zero interest rate i t0 =0 s t0 +1 t = s t0 +1 s t0 +1 t 0 s t0 + i t 0 =ˆπ π + i t 0 > ϕ t0 Expected (one-period domestic-currency) return on foreign bonds greater than return on domestic bonds Excess supply of domestic currency CB buys domestic currency at rate s t0, looses FX reserves 4. Credible peg, equilibrium interest rate i t0 + =ˆπ π + i t 0 + ϕ t0 > 0 FX market in equilibrium, no FX interventions Reduction in money demand/supply m t0 + p t0 = g(i t0 +,y t0 ) <m t0 p t0 Composition domestic credit/fx reserves subject to choice 16
9 Real UIP (examine real interest rate) (r t = i t π t+1 t, r t = i t π t+1 t ) Steady state Solve (9) forward r t = r t + q t+1 t q t + ϕ t (9) r = r + ϕ XT 1 XT 1 (r t+τ t r) = (rt+τ t XT 1 r )+q t+t t q t + (ϕ t+τ t ϕ) τ=0 q t+t t q (T ) ρ t τ=0 ρ t = ρ t + q q t + Φ t (10) X X (r t+τ t r) T (rt T r), Φ t = (ϕ t+τ t ϕ) τ=0 q t0 ρ t0 Real depreciation Reduction in long real interest rate τ=0 τ=0 17 Jump-starts economy Real depreciation Reduction in long real interest rate Increased aggregate demand and output 18
10 Inflation expectations Exchange rate-peg implies Initial real depreciation below steady state Expected (long-run) real appreciation (q t+1 q t ) [(p t+1 + s t+1 p t+1 ) (p t + s t p t )=(π t+1 ˆπ) (π t+1 π ) > 0 (Assume π t+1 π ) Expected real appreciation Expected inflation > ˆπ 19 Inflation > ˆπ Increased costs (real depreciation) Increased output (gap) Increased inflation expectations Inflation > ˆπ Real appreciation Price level approaches price-level target path from below When price-level target path reached, abandon exchange-rate peg for FPT or FIT 20
11 Role of price-level target and exchange rate peg Price-level target path Nominal anchor, benchmark Price gap to undo Exit strategy for exchange-rate peg Devaluation and temporary exchange-rate peg Technically feasible Provides benchmark Jump-starts economy: Increases output Creates inflation and inflation expectations 21 Comparison with other proposals Krugman, Posen: Announce inflation target, future monetary expansion Why credible? Price-level target path better anchor than inflation target Long-run inflation expectations independent of timing Price gap to undo Devaluation and exchange-rate peg demonstrates commitment Do, not just say Induces expectations of real appreciation and inflation 22
12 Meltzer, McCallum, Bernanke: FX interventions to depreciate currency Temporary peg more structure, benchmark Portfolio-balance effects (endogenous risk premia) McCallum reaction function s t = s t 1 + ν 0 ν 1 (π t,t 1 π ) ν 2 (x t,t 1 ) Time-varying exchange-rate target/instrument s t : Commitment to buy/sell unlimited amounts of FX at rate s t More complex commitment and benchmark, less verifiable Parameter values? Interest-rate setting? Exit strategy? 23 McKinnon, McKinnon-Ohno: Permanent bilateral peg $-=Y Would escape liquidity trap by i t = i t No real depreciation to jump-start economy No price gap to undo Sustainable? Optimal? Temporary peg, exit strategy Unilateral 24
13 Quantitative easing (Meltzer, Nakahara, current) Money and T-bills (close to) perfect substitutes Volumes, targets? Exit strategy? 25 Is it really foolproof? Technical problems Steady-state real exchange rate UIP, FX risk premia Sticky deflation Price-level target path credible? 26
14 Political problems (Japan) Reactions from BOJ (summer 2000) (Ueda 00) Since one cannot be absolutely sure, that any given policy action or change in the monetary policy regime will succeed in getting the economy out of the liquidity trap, it is safer not to try. Prudent policy: Try a number of suggested remedies (as long as not inconsistent), some may work Foolproof way might be useful if needed, but not needed now. Problems are over! DirectproposaltoMOFandUSTreasury. Myopic bureaucratic interests and technical details before national welfare Lack of Rooseveltian resolve (Bernanke) 27 BOJ and MOF cooperation MOF in charge of exchange-rate policy Shift burden from fiscal policy to monetary policy Beggar thy neighbor? Regional and US reactions? Easier 1 2 years ago Lower long-run real interest rate requires real depreciation Current-account effects of real depreciation ambiguous Region, U.S. and world gain in long run Other policy changes/reforms needed Financial-sector clean-up (Swedish way) 28
15 Summary There is a foolproof way It can help Japan (but is not enough alone) Any political problems can be solved Show Rooseveltian resolve The only thing we have to fear is fear itself... which paralyzes needed efforts to convert retreat into advance. 29
Monetary policy at the ZLB in the current crisis
Monetary policy at the ZLB in the current crisis Lars E.O. Svensson May 2009 1 Lars E.O. Svensson Monetary policy at ZLB Monetary policy so far Policy rates have been brought down 6,0 5,0 4,0 3,0 Sweden
More informationComment on: The zero-interest-rate bound and the role of the exchange rate for. monetary policy in Japan. Carl E. Walsh *
Journal of Monetary Economics Comment on: The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan Carl E. Walsh * Department of Economics, University of California,
More information7.1 Assumptions: prices sticky in SR, but flex in MR, endogenous expectations
7 Lecture 7(I): Exchange rate overshooting - Dornbusch model Reference: Krugman-Obstfeld, p. 356-365 7.1 Assumptions: prices sticky in SR, but flex in MR, endogenous expectations Clearly it applies only
More informationPlease choose the most correct answer. You can choose only ONE answer for every question.
Please choose the most correct answer. You can choose only ONE answer for every question. 1. Only when inflation increases unexpectedly a. the real interest rate will be lower than the nominal inflation
More information14.02 PRINCIPLES OF MACROECONOMICS QUIZ 3 05/10/2012
14.02 PRINCIPLES OF MACROECONOMICS QUIZ 3 05/10/2012 PROFESSOR: FRANCESCO GIAVAZZI NAME: FRIDAY RECITATION: 1. True/False/Uncertain [30 points] Please state whether each of the following claims are true,
More informationIntermediate Macroeconomics, 7.5 ECTS
STOCKHOLMS UNIVERSITET Intermediate Macroeconomics, 7.5 ECTS SEMINAR EXERCISES STOCKHOLMS UNIVERSITET page 1 SEMINAR 1. Mankiw-Taylor: chapters 3, 5 and 7. (Lectures 1-2). Question 1. Assume that the production
More informationThe zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan,
The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan, Günter Coenen European Central Bank Volker Wieland Goethe University of Frankfurt and European Central Bank
More informationMonetary and Fiscal Policy During the Great Recession: Old Challenges and New Insights
Monetary and Fiscal Policy During the Great Recession: Old Challenges and New Insights Ken Kuttner Oberlin College Japanese Monetary Policy: Experience and Future Economic and Social Research Institute
More informationAdvanced Macroeconomics 4. The Zero Lower Bound and the Liquidity Trap
Advanced Macroeconomics 4. The Zero Lower Bound and the Liquidity Trap Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) The Zero Lower Bound Spring 2015 1 / 26 Can Interest Rates Be Negative?
More informationInflation Targeting and Optimal Monetary Policy. Michael Woodford Princeton University
Inflation Targeting and Optimal Monetary Policy Michael Woodford Princeton University Intro Inflation targeting an increasingly popular approach to conduct of monetary policy worldwide associated with
More informationMisconceptions Regarding the Zero Lower Bound on Interest Rates
Misconceptions Regarding the Zero Lower Bound on Interest Rates Keynote Speech by Bennett T. McCallum The paper reviews issues related to the zero lower bound (ZLB) on interest rates and argues that all
More informationPolicy in the Great Recession
Policy in the Great Recession Pedro Serôdio July 25, 2016 In the 1930s, Keynes and Hicks argued that during a depression, monetary policy is completely ineffective at influencing the level of activity,
More informationAsset purchase policy at the effective lower bound for interest rates
at the effective lower bound for interest rates Bank of England 12 March 2010 Plan Introduction The model The policy problem Results Summary & conclusions Plan Introduction Motivation Aims and scope The
More informationEscaping the Great Recession 1
Escaping the Great Recession 1 Francesco Bianchi Duke University Leonardo Melosi FRB Chicago ECB workshop on Non-Standard Monetary Policy Measures 1 The views in this paper are solely the responsibility
More informationA MODEL OF SECULAR STAGNATION
A MODEL OF SECULAR STAGNATION Gauti B. Eggertsson and Neil R. Mehrotra Brown University Portugal June, 2015 1 / 47 SECULAR STAGNATION HYPOTHESIS I wonder if a set of older ideas... under the phrase secular
More informationECON 4325 Monetary Policy Lecture 11: Zero Lower Bound and Unconventional Monetary Policy. Martin Blomhoff Holm
ECON 4325 Monetary Policy Lecture 11: Zero Lower Bound and Unconventional Monetary Policy Martin Blomhoff Holm Outline 1. Recap from lecture 10 (it was a lot of channels!) 2. The Zero Lower Bound and the
More informationThe Dire Effects of the Lack of Monetary and Fiscal Coordination 1
The Dire Effects of the Lack of Monetary and Fiscal Coordination 1 Francesco Bianchi and Leonardo Melosi Duke University and FRB of Chicago The views in this paper are solely the responsibility of the
More informationSPECULATIVE ATTACKS 3. OUR MODEL. B t 1 + x t Rt 1
Eco504, Part II Spring 2002 C. Sims SPECULATIVE ATTACKS 1. SPECULATIVE ATTACKS: THE FACTS Back to the times of the gold standard, it had been observed that there were occasional speculative attacks", in
More informationThe Magic of the Exchange Rate: Optimal Escape from a Liquidity Trap in Small and Large Open Economies
Mag407.tex Preliminary. Comments welcome. The Magic of the Exchange Rate: Optimal Escape from a Liquidity Trap in Small and Large Open Economies Lars E.O. Svensson Stockholm School of Economics, CEPR,
More informationDiscussion of Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound
Discussion of Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound Robert G. King Boston University and NBER 1. Introduction What should the monetary authority do when prices are
More informationChapter 7 Fixed Exchange Rate Regimes and Short Run Macroeconomic Policy
George Alogoskoufis, International Macroeconomics and Finance Chapter 7 Fixed Exchange Rate Regimes and Short Run Macroeconomic Policy Up to now we have been assuming that the exchange rate is determined
More informationNBER WORKING PAPER SERIES OPTIMAL MONETARY POLICY IN A LIQUIDITY TRAP. Gauti B. Eggertsson Michael Woodford
NBER WORKING PAPER SERIES OPTIMAL MONETARY POLICY IN A LIQUIDITY TRAP Gauti B. Eggertsson Michael Woodford Working Paper 9968 http://www.nber.org/papers/w9968 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050
More informationOptimal Monetary Policy
Optimal Monetary Policy Lars E.O. Svensson Sveriges Riksbank www.princeton.edu/svensson Norges Bank, November 2008 1 Lars E.O. Svensson Sveriges Riksbank www.princeton.edu/svensson Optimal Monetary Policy
More information14.05 Intermediate Applied Macroeconomics Problem Set 5
14.05 Intermediate Applied Macroeconomics Problem Set 5 Distributed: November 15, 2005 Due: November 22, 2005 TA: Jose Tessada Frantisek Ricka 1. Rational exchange rate expectations and overshooting The
More informationA MODEL OF SECULAR STAGNATION
A MODEL OF SECULAR STAGNATION Gauti B. Eggertsson and Neil R. Mehrotra Brown University Princeton February, 2015 1 / 35 SECULAR STAGNATION HYPOTHESIS I wonder if a set of older ideas... under the phrase
More informationLecture 6: Intermediate macroeconomics, autumn Lars Calmfors
Lecture 6: Intermediate macroeconomics, autumn 2009 Lars Calmfors 1 Topics Systems of fixed exchange rates Interest rate parity under a fixed exchange rate Stabilisation policy under a fixed exchange rate
More informationEco 504, Macroeconomic Theory II Final exam, Part 1, Monetary Theory and Policy, with Solutions
Eco 504, Part 1, Spring 2006 504_F1s_S06.tex Lars Svensson 3/16/06 Eco 504, Macroeconomic Theory II Final exam, Part 1, Monetary Theory and Policy, with Solutions Answer all questions. You have 120 minutes
More informationA MODEL OF SECULAR STAGNATION
A MODEL OF SECULAR STAGNATION Gauti B. Eggertsson and Neil R. Mehrotra Brown University BIS Research Meetings March 11, 2015 1 / 38 SECULAR STAGNATION HYPOTHESIS I wonder if a set of older ideas... under
More informationLECTURE 8 Monetary Policy at the Zero Lower Bound. October 19, 2011
Economics 210c/236a Fall 2011 Christina Romer David Romer LECTURE 8 Monetary Policy at the Zero Lower Bound October 19, 2011 I. PAUL KRUGMAN, IT S BAAACK: JAPAN S SLUMP AND THE RETURN OF THE LIQUIDITY
More informationGeneral Examination in Macroeconomic Theory SPRING 2014
HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS General Examination in Macroeconomic Theory SPRING 2014 You have FOUR hours. Answer all questions Part A (Prof. Laibson): 48 minutes Part B (Prof. Aghion): 48
More informationNotes VI - Models of Economic Fluctuations
Notes VI - Models of Economic Fluctuations Julio Garín Intermediate Macroeconomics Fall 2017 Intermediate Macroeconomics Notes VI - Models of Economic Fluctuations Fall 2017 1 / 33 Business Cycles We can
More informationDemand-Led Growth and Accommodating Supply*
Demand-Led Growth and Accommodating Supply* Steven Fazzari, Washington University in St. Louis Piero Ferri, University of Bergamo (Italy) AnnaMaria Variato, University of Bergamo (Italy) This version,
More informationFinal Exam Solutions
14.06 Macroeconomics Spring 2003 Final Exam Solutions Part A (True, false or uncertain) 1. Because more capital allows more output to be produced, it is always better for a country to have more capital
More informationEcon 3029 Advanced Macro. Lecture 2: The Liquidity Trap
2017-2018 Econ 3029 Advanced Macro Lecture 2: The Liquidity Trap Franck Portier F.Portier@UCL.ac.uk University College London Version 1.1 29/01/2018 Changes from version 1.0 are in red 1 / 73 Disclaimer
More informationFragility of Incomplete Monetary Unions
Fragility of Incomplete Monetary Unions Incomplete monetary unions Fixed exchange-rate regimes that fall short of a full monetary union but they substantially constrain the ability of the national government
More informationCapital Controls and Optimal Chinese Monetary Policy 1
Capital Controls and Optimal Chinese Monetary Policy 1 Chun Chang a Zheng Liu b Mark Spiegel b a Shanghai Advanced Institute of Finance b Federal Reserve Bank of San Francisco International Monetary Fund
More information14.02 Quiz 3. Time Allowed: 90 minutes. Fall 2012
14.02 Quiz 3 Time Allowed: 90 minutes Fall 2012 NAME: MIT ID: FRIDAY RECITATION: FRIDAY RECITATION TA: This quiz has a total of 3 parts/questions. The first part has 13 multiple choice questions where
More informationCredit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal 1 / of19
Credit Crises, Precautionary Savings and the Liquidity Trap (R&R Quarterly Journal of nomics) October 31, 2016 Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal
More informationA dynamic approach to short run economic fluctuations. The DAD/DAS model. Part 3 The long run equilibrium & short run fluctuations.
A dynamic approach to short run economic fluctuations. The DAD/DAS model Part 3 The long run equilibrium & short run fluctuations. The DAD-DAS model s long-run equilibrium Recall the long-run equilibrium
More informationInflation & Welfare 1
1 INFLATION & WELFARE ROBERT E. LUCAS 2 Introduction In a monetary economy, private interest is to hold not non-interest bearing cash. Individual efforts due to this incentive must cancel out, because
More informationComments on Jeffrey Frankel, Commodity Prices and Monetary Policy by Lars Svensson
Comments on Jeffrey Frankel, Commodity Prices and Monetary Policy by Lars Svensson www.princeton.edu/svensson/ This paper makes two main points. The first point is empirical: Commodity prices are decreasing
More informationEC202 Macroeconomics
EC202 Macroeconomics Koç University, Summer 2014 by Arhan Ertan Study Questions 4 1. Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r 200 + 2(M/P), while
More informationCoping with the Zero Nominal Bound
Economics 196 Spring 2012 David Romer Coping with the Zero Nominal Bound April 3, 2012 A Couple of Ground Rules No electronic devices. I expect you to participate. I. INTRODUCTION Unemployment has been
More informationMonetary Policy in a New Keyneisan Model Walsh Chapter 8 (cont)
Monetary Policy in a New Keyneisan Model Walsh Chapter 8 (cont) 1 New Keynesian Model Demand is an Euler equation x t = E t x t+1 ( ) 1 σ (i t E t π t+1 ) + u t Supply is New Keynesian Phillips Curve π
More informationPrinciples of Banking (III): Macroeconomics of Banking (1) Introduction
Principles of Banking (III): Macroeconomics of Banking (1) Jin Cao (Norges Bank Research, Oslo & CESifo, München) Outline 1 2 Disclaimer (If they care about what I say,) the views expressed in this manuscript
More informationCHAPTER 17 (7e) 1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.
Self-practice (Open Economy) Ch 17(7e): Q1, Q2, Q5 Ch 18(7e): Q1, Q2, Q5, Q7, Ch 20(6e): Q1-Q5 CHAPTER 17 (7e) 1. Using the information in this chapter, label each of the following statements true, false,
More informationExchange Rate Policies at the Zero Lower Bound
Exchange Rate Policies at the Zero Lower Bound Manuel Amador, Javier Bianchi, Luigi Bocola, Fabrizio Perri MPLS Fed and UMN MPLS Fed MPLS Fed and Northwestern MPLS Fed Bank of France, November 2017 The
More information4/14/2011. Exchange Rate Policy and Devaluation. The Central Bank Balance Sheet. Central Bank Policy Options in a Crisis
Exchange Rate Policy and Devaluation BOP Surpluses: excess supply of Forex CB buys BOP Deficits: excess demand for Forex CB sells OSB must offset BOP ISLM-FX with an unexpected devaluation ISLM-FX with
More information5. An increase in government spending is represented as a:
Romer Section 1 1. The IS curve represents combinations of Y and r that: a. are consistent with equilibrium in the money market. b. are consistent with equilibrium in the goods market. c. are positively
More informationThe Effects of Dollarization on Macroeconomic Stability
The Effects of Dollarization on Macroeconomic Stability Christopher J. Erceg and Andrew T. Levin Division of International Finance Board of Governors of the Federal Reserve System Washington, DC 2551 USA
More information3. TFU: A zero rate of increase in the Consumer Price Index is an appropriate target for monetary policy.
Econ 304 Fall 2014 Final Exam Review Questions 1. TFU: Many Americans derive great utility from driving Japanese cars, yet imports are excluded from GDP. Thus GDP should not be used as a measure of economic
More informationUNIVERSITY OF CALIFORNIA Economics 134 DEPARTMENT OF ECONOMICS Spring 2018 Professor David Romer NOTES ON THE MIDTERM
UNIVERSITY OF CALIFORNIA Economics 134 DEPARTMENT OF ECONOMICS Spring 2018 Professor David Romer NOTES ON THE MIDTERM Preface: This is not an answer sheet! Rather, each of the GSIs has written up some
More informationFiscal Consolidation in a Currency Union: Spending Cuts Vs. Tax Hikes
Fiscal Consolidation in a Currency Union: Spending Cuts Vs. Tax Hikes Christopher J. Erceg and Jesper Lindé Federal Reserve Board October, 2012 Erceg and Lindé (Federal Reserve Board) Fiscal Consolidations
More informationLastrapes Fall y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t ).
ECON 8040 Final exam Lastrapes Fall 2007 Answer all eight questions on this exam. 1. Write out a static model of the macroeconomy that is capable of predicting that money is non-neutral. Your model should
More informationS V E R I G E S R I K S B A N K. Economic Review 2009:2. Sveriges Riksbank
Sveriges Riksbank Economic Review published by sveriges riksbank 2009:2 S V E R I G E S R I K S B A N K Economic Review 2009:2 SVERIGES RIKSBANK ECONOMIC REVIEW is issued by Sveriges Riksbank three to
More informationChapter 8 A Short Run Keynesian Model of Interdependent Economies
George Alogoskoufis, International Macroeconomics, 2016 Chapter 8 A Short Run Keynesian Model of Interdependent Economies Our analysis up to now was related to small open economies, which took developments
More informationOn the new Keynesian model
Department of Economics University of Bern April 7, 26 The new Keynesian model is [... ] the closest thing there is to a standard specification... (McCallum). But it has many important limitations. It
More informationInflation targeting: A supplement to Open Economy Macroeconomics
Inflation targeting: A supplement to Open Economy Macroeconomics Asbjørn Rødseth March 28, 2011 Preliminary and incomplete c Asbjørn Rødseth 2011 Abstract The purpose of this compendium is to show how
More informationUnconventional Monetary Policy
Dr Martin Weale External MPC Member, University of Nottingham 8 th March 2016 Outline: Four Types of Unconventional Policy 1. Asset purchases (quantitative easing) 2. Forward guidance 3. Monetary finance
More informationECN 106 Macroeconomics 1. Lecture 10
ECN 106 Macroeconomics 1 Lecture 10 Giulio Fella c Giulio Fella, 2012 ECN 106 Macroeconomics 1 - Lecture 10 279/318 Roadmap for this lecture Shocks and the Great Recession of 2008- Liquidity trap and the
More informationAnswers to Problem Set #6 Chapter 14 problems
Answers to Problem Set #6 Chapter 14 problems 1. The five equations that make up the dynamic aggregate demand aggregate supply model can be manipulated to derive long-run values for the variables. In this
More informationKevin Clinton October 2005 Open-economy monetary and fiscal policy
Kevin Clinton October 2005 Open-economy monetary and fiscal policy Reference Ken Rogoff. Dornbusch s overshooting model after 25 years. IMF Staff Papers 49, Special Issue 2002. 1. What monetary policy
More informationExpectations and Anti-Deflation Credibility in a Liquidity Trap:
Expectations and Anti-Deflation Credibility in a Liquidity Trap: Contribution to a Panel Discussion Remarks at the Bank of Japan's 11 th research conference, Tokyo, July 2004 (Forthcoming, Monetary and
More informationEco202 Review, April 2011, Prof. Bill Even. I. Introduction. A. The causes of the great recession B. Government responses to great recession
Eco202 Review, April 2011, Prof. Bill Even I. Introduction. A. The causes of the great recession B. Government responses to great recession II. III. Chapter 4: Measuring GDP and Economic Growth A. Definition
More informationPart B (Long Questions)
Part B (Long Questions) Question B.1: Mundell-Fleming Model with Flexible Exchange Rates Suppose that a small open economy can be represented by the following model with a flexible exchange rate: C d =
More information14.02 Solutions Quiz III Spring 03
Multiple Choice Questions (28/100): Please circle the correct answer for each of the 7 multiple-choice questions. In each question, only one of the answers is correct. Each question counts 4 points. 1.
More informationThe Expansionary Lower Bound: A Theory of Contractionary Monetary Easing *
The Expansionary Lower Bound: A Theory of Contractionary Monetary Easing * Paolo Cavallino Damiano Sandri IMF Research Department CEBRA - Boston Policy Workshop July 2017 * The views expressed herein are
More informationMONETARY POLICY IN A GLOBAL RECESSION
MONETARY POLICY IN A GLOBAL RECESSION James Bullard* Federal Reserve Bank of St. Louis Monetary Policy in the Current Crisis Banque de France and Toulouse School of Economics Paris, France March 20, 2009
More informationMonetary Policy Bank Indonesia International Workshop and Seminar Central Bank Policy Mix: Issues, Challenges and Policies Jakarta, 9-13 April 2018
Monetary Policy Bank Indonesia International Workshop and Seminar Central Bank Policy Mix: Issues, Challenges and Policies Jakarta, 9-13 April 2018 Stephan Danninger The views expressed herein are those
More informationJapan s Lost Decade: Escaping Liquidity Trap and Preventing Deflation
Social Sciences Journal Volume 10 Issue 1 Article 12 2010 Japan s Lost Decade: Escaping Liquidity Trap and Preventing Deflation Robert A. Milburn Western Connecticut State University Follow this and additional
More informationCPI Inflation Targeting and the UIP Puzzle: An Appraisal of Instrument and Target Rules
CPI Inflation Targeting and the UIP Puzzle: An Appraisal of Instrument and Target Rules By Alfred V Guender Department of Economics University of Canterbury I. Specification of Monetary Policy What Should
More informationA Central Bank Theory of Price Level Determination
A Central Bank Theory of Price Level Determination Pierpaolo Benigno (LUISS and EIEF) Monetary Policy in the 21st Century CIGS Conference on Macroeconomic Theory and Policy 2017 May 30, 2017 Pierpaolo
More informationUnconventional Monetary Policy during the Great Recession: Theory, Empirical Evidence and Limitations. Kilian Rieder 1.
Unconventional Monetary Policy during the Great Recession: Theory, Empirical Evidence and Limitations Kilian Rieder 1 1 University of Oxford, kilian.rieder@univ.ox.ac.uk Paris Dauphine, London Campus Guest
More informationChapter 22. Modern Business Cycle Theory
Chapter 22 Modern Business Cycle Theory Preview To examine the two modern business cycle theories the real business cycle model and the new Keynesian model and compare them with earlier Keynesian models
More informationComment on The Central Bank Balance Sheet as a Commitment Device By Gauti Eggertsson and Kevin Proulx
Comment on The Central Bank Balance Sheet as a Commitment Device By Gauti Eggertsson and Kevin Proulx Luca Dedola (ECB and CEPR) Banco Central de Chile XIX Annual Conference, 19-20 November 2015 Disclaimer:
More informationMODELING THE INFLUENCE OF FISCAL POLICY ON INFLATION
FISCAL POLICY AND INFLATION MODELING THE INFLUENCE OF FISCAL POLICY ON INFLATION CHRISTOPHER A. SIMS 1. WE NEED TO START MODELING FISCAL-MONETARY INTERACTIONS In the US currently, the public s beliefs,
More informationIntroduction to Macroeconomics
Robert M. Kunst robert.kunst@univie.ac.at University of Vienna and Institute for Advanced Studies Vienna June 19, 2012 Outline Introduction National accounts The goods market The financial market The IS-LM
More informationMacro (8701) & Micro (8703) option
WRITTEN PRELIMINARY Ph.D EXAMINATION Department of Applied Economics Jan./Feb. - 2010 Trade, Development and Growth For students electing Macro (8701) & Micro (8703) option Instructions Identify yourself
More informationAnswers to Problem Set #8
Macroeconomic Theory Spring 2013 Chapter 15 Answers to Problem Set #8 1. The five equations that make up the dynamic aggregate demand aggregate supply model can be manipulated to derive long-run values
More informationOil Shocks and the Zero Bound on Nominal Interest Rates
Oil Shocks and the Zero Bound on Nominal Interest Rates Martin Bodenstein, Luca Guerrieri, Christopher Gust Federal Reserve Board "Advances in International Macroeconomics - Lessons from the Crisis," Brussels,
More informationFinal Exam: Quick Review
Final Exam: Quick Review Intermediate Macroeconomics, Fall 25 The University of Notre Dame Professor Sims. Money (a) We give money a functional definition money is something which serves as a medium of
More informationState-Dependent Fiscal Multipliers: Calvo vs. Rotemberg *
State-Dependent Fiscal Multipliers: Calvo vs. Rotemberg * Eric Sims University of Notre Dame & NBER Jonathan Wolff Miami University May 31, 2017 Abstract This paper studies the properties of the fiscal
More informationDeviations from full employment in a closed economy Short-run equilibrium Monetary and fiscal policy
Kevin Clinton Winter 2005 Deviations from full employment in a closed economy Short-run equilibrium Monetary and fiscal policy Some key features we can ignore in the long run are crucial in the short run:
More informationTeaching Inflation Targeting: An Analysis for Intermediate Macro. Carl E. Walsh * September 2000
Teaching Inflation Targeting: An Analysis for Intermediate Macro Carl E. Walsh * September 2000 * Department of Economics, SS1, University of California, Santa Cruz, CA 95064 (walshc@cats.ucsc.edu) and
More informationOptimal Monetary Policy in the new Keynesian model. The two equations for the AD curve and the Phillips curve are
Economics 05 K. Kletzer Spring 05 Optimal Monetary Policy in the new Keynesian model The two equations for the AD curve and the Phillips curve are y t E t y t+ σ (i t E t π t+ δ)+g t (AD) and π t E t π
More informationL-4 Analyzing Inflation and Assessing Monetary Policy
L-4 Analyzing Inflation and Assessing Monetary Policy IMF Singapore Regional Training Institute OT 18.52 Macroeconomic Diagnostics February 26 March 2, 2018 Presenter Reza Siregar This training material
More informationY t )+υ t. +φ ( Y t. Y t ) Y t. α ( r t. + ρ +θ π ( π t. + ρ
Macroeconomics ECON 2204 Prof. Murphy Problem Set 6 Answers Chapter 15 #1, 3, 4, 6, 7, 8, and 9 (on pages 462-63) 1. The five equations that make up the dynamic aggregate demand aggregate supply model
More informationSTRUCTURAL TRANSFORMATION AND UNEMPLOYMENT EQUILIBRIUM. Joseph E. Stiglitz Trento Summer School July 2016
STRUCTURAL TRANSFORMATION AND UNEMPLOYMENT EQUILIBRIUM Joseph E. Stiglitz Trento Summer School July 2016 Views about 2008 crisis Before the crisis, the US (and to a large extent the global) economy was
More informationQUEEN S UNIVERSITY FACULTY OF ARTS AND SCIENCE DEPARTMENT OF ECONOMICS. Economics 222 A&B Macroeconomic Theory I. Final Examination 20 April 2009
Page 1 of 9 QUEEN S UNIVERSITY FACULTY OF ARTS AND SCIENCE DEPARTMENT OF ECONOMICS Economics 222 A&B Macroeconomic Theory I Final Examination 20 April 2009 Instructors: Nicolas-Guillaume Martineau (Section
More informationMonetary Theory and Policy. Fourth Edition. Carl E. Walsh. The MIT Press Cambridge, Massachusetts London, England
Monetary Theory and Policy Fourth Edition Carl E. Walsh The MIT Press Cambridge, Massachusetts London, England Contents Preface Introduction xiii xvii 1 Evidence on Money, Prices, and Output 1 1.1 Introduction
More informationChapter 24. The Role of Expectations in Monetary Policy
Chapter 24 The Role of Expectations in Monetary Policy Lucas Critique of Policy Evaluation Macro-econometric models collections of equations that describe statistical relationships among economic variables
More informationMonetary and Fiscal Policy
Monetary and Fiscal Policy Part 3: Monetary in the short run Lecture 6: Monetary Policy Frameworks, Application: Inflation Targeting Prof. Dr. Maik Wolters Friedrich Schiller University Jena Outline Part
More informationGehrke: Macroeconomics Winter term 2012/13. Exercises
Gehrke: 320.120 Macroeconomics Winter term 2012/13 Questions #1 (National accounts) Exercises 1.1 What are the differences between the nominal gross domestic product and the real net national income? 1.2
More informationTransactions and Money Demand Walsh Chapter 3
Transactions and Money Demand Walsh Chapter 3 1 Shopping time models 1.1 Assumptions Purchases require transactions services ψ = ψ (m, n s ) = c where ψ n s 0, ψ m 0, ψ n s n s 0, ψ mm 0 positive but diminishing
More informationThe Zero Lower Bound
The Zero Lower Bound Eric Sims University of Notre Dame Spring 4 Introduction In the standard New Keynesian model, monetary policy is often described by an interest rate rule (e.g. a Taylor rule) that
More informationEco504 Fall 2010 C. Sims CAPITAL TAXES
Eco504 Fall 2010 C. Sims CAPITAL TAXES 1. REVIEW: SMALL TAXES SMALL DEADWEIGHT LOSS Static analysis suggests that deadweight loss from taxation at rate τ is 0(τ 2 ) that is, that for small tax rates the
More information양적완화의성공조건 한국금융학회정책세미나 2016 년 6 월 성태윤연세대학교경제학부
양적완화의성공조건 한국금융학회정책세미나 2016 년 6 월 성태윤연세대학교경제학부 Contents Quantitative Easing (QE) Quantitative Easing (QE) in the United States Japan s lost decades Forward Guidance Korean version of Quantitative Easing
More informationThe Zero Bound on Nominal Interest Rates: Implications for Monetary Policy
The Zero Bound on Nominal Interest Rates: Implications for Monetary Policy Claude Lavoie and Stephen Murchison, Research Department The lower bound on nominal interest rates is typically close to zero,
More information1 Introduction When the short-term nominal interest rate is very close to zero, the substitutability between short-term bonds, or monetary policy inst
Optimal Monetary Policy at the Zero-Interest-Rate Bound Taehun Jung, Yuki Teranishi, and Tsutomu Watanabe Λ Hitotsubashi University First draft: February 28, 2001 This version: June 16, 2003 Abstract What
More informationOn the Merits of Conventional vs Unconventional Fiscal Policy
On the Merits of Conventional vs Unconventional Fiscal Policy Matthieu Lemoine and Jesper Lindé Banque de France and Sveriges Riksbank The views expressed in this paper do not necessarily reflect those
More information