A NOTE ON ROBUST MONETARY POLICY AND NON-ZERO TREND INFLATION

2018 ◽  
Vol 24 (6) ◽  
pp. 1574-1594 ◽  
Author(s):  
Kohei Hasui
Keyword(s):  
Monetary Policy ◽  
Model Uncertainty ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Macroeconomic Variables ◽  
Control Techniques ◽  
Princeton University ◽  
Keynesian Model ◽  
Trend Inflation ◽  
The One

This paper studies how model uncertainty influences economic fluctuation when trend inflation is high. We introduce Hansen and Sargent’s [(2008) Robustness, Princeton University Press] robust control techniques into a New Keynesian model with non-zero trend inflation. We reveal the following three points. First, we find that robust monetary policy responds more aggressively. This aggressiveness increases with trend inflation. Second, as the trend inflation rises, the response of macroeconomic variables is larger under robust policy. Third, stronger robustness tends to lead to indeterminate equilibrium as trend inflation increases. Consequently, the economy might be volatile when trend inflation is high due to robustness from the view of both variance and determinacy. We interpret the results as indicating that the model uncertainty might be the one of the factors causing large macroeconomic fluctuations when trend inflation is high.

scholarly journals ROBUST MONETARY POLICY IN THE NEW KEYNESIAN FRAMEWORK

2008 ◽  
Vol 12 (S1) ◽  
pp. 126-135 ◽  
Author(s):  
KAI LEITEMO ◽  
ULF SÖDERSTRÖM
Keyword(s):  
Monetary Policy ◽  
Robust Control ◽  
Simple Model ◽  
Model Uncertainty ◽  
New Keynesian ◽  
Model Structure ◽  
New Keynesian Model ◽  
Closed Form Solutions ◽  
Control Techniques ◽  
Keynesian Model

We study the effects of model uncertainty in a simple New Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analyzing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the nonrobust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

Generalizing the Taylor Principle: Reply

2010 ◽  
Vol 100 (1) ◽  
pp. 618-624 ◽  
Author(s):  
Troy Davig ◽  
Eric M Leeper
Keyword(s):  
Monetary Policy ◽  
Regime Switching ◽  
Multiple Solutions ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
The One

Farmer, Waggoner, and Zha (2009) (FWZ) show that a new Keynesian model with regime-switching monetary policy can support multiple solutions, appearing to contradict findings in Davig and Leeper (2007) (DL). The explanation is straightforward: FWZ derive solutions using a model that differs from the one to which the DL conditions apply. The FWZ solutions also require that the exogenous driving process is a function of private and policy parameters. This undermines the sharp distinctions among “deep parameters” typical of optimizing models and makes it difficult to ascribe economic interpretations to FWZ's additional solutions. (E12, E31, E43, E52)

scholarly journals Thai Monetary Policy Under the Inflation Targeting Regime

2020 ◽  
Author(s):  
Nipit Wongpunya
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Inflation Targeting ◽  
Aggregate Demand ◽  
State Level ◽  
Dynamic Stochastic General Equilibrium ◽  
New Keynesian ◽  
Keynesian Model ◽  
Trend Inflation ◽  
Dynamic Stochastic

Abstract This paper explores the macroeconomic effects of inflation targeting in Thailand. Furthermore, this study uses a nonlinear new Keynesian model under the dynamic stochastic general equilibrium framework with price indexation to analyze the monetary policy under inflation targeting in Thailand. The model is estimated using a Bayesian statistic for the Thai economy. It shows that inflation is more stabilized and inflation persistence has fallen after adopting inflation targeting. The paper also indicates that the Bank of Thailand is more responsive to the deviation of inflation from its target using inflation targeting. The key monetary mechanism exists through changes in the real interest rate which affect aggregate demand. It is worth noting that the larger the inflation targeting rate is, the lower the steady state output from its steady state level given no trend inflation.

INNOVATION, GROWTH, AND OPTIMAL MONETARY POLICY

2019 ◽  
pp. 1-24
Author(s):  
Barbara Annicchiarico ◽  
Alessandra Pelloni
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Public Spending ◽  
New Keynesian ◽  
Positive Trend ◽  
Policy Recommendation ◽  
Optimal Monetary Policy ◽  
Keynesian Model ◽  
Trend Inflation ◽  
Short Run

This paper examines how innovation-led growth affects optimal monetary policy. We consider the Ramsey policy in a New Keynesian model where R&D leads to an expanding variety of intermediate goods and compare the results with those obtained when the expansion occurs exogenously. Positive trend inflation is found to be optimal under both assumptions, but much higher with profit-seeking innovation. Optimal monetary policy must be counter-cyclical in response to both technology and public spending shocks, yet the intensity of the reaction crucially depends on the presence of an R&D sector. However, the small amount of short-run deviations of prices from the non-zero trend inflation observed in response to shocks suggests inflation targeting as a robust policy recommendation.

scholarly journals The Macroeconomics of Trend Inflation

2014 ◽  
Vol 52 (3) ◽  
pp. 679-739 ◽  
Author(s):  
Guido Ascari ◽  
Argia M. Sbordone
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Positive Trend ◽  
Zero Lower Bound ◽  
Keynesian Model ◽  
Long Run ◽  
Trend Inflation ◽  
Inflation Targets

Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model, an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target. (JEL E12, E31, E32, E52, E58)

Leaning-Against-the-Wind: Which Policy and When?

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Daeha Cho ◽  
Junghwan Mok ◽  
Myungkyu Shim
Keyword(s):  
Monetary Policy ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Capital Requirement ◽  
Aggregate Fluctuations ◽  
Policy Rule ◽  
Keynesian Model ◽  
Monetary Policy Rule ◽  
Stabilization Effect ◽  
Leaning Against The Wind

AbstractThis paper quantitatively examines which of the following three widely-used leaning-against-the-wind policies is effective in stabilizing aggregate fluctuations: i) a monetary policy that responds to the loan-to-GDP ratio, ii) a countercyclical LTV policy, and iii) a countercyclical capital requirement policy. In particular, we estimate a New Keynesian model with financial frictions using U.S. data and find that a monetary policy rule that responds positively to the loan-to-GDP ratio Amplifies the macroeconomic fluctuations while a countercyclical LTV policy has almost no effect. On the contrary, a countercyclical capital requirement policy is the most desirable in stabilizing GDP, inflation, and loans. However, the stabilization effect of the optimal countercyclical capital requirement policy is concentrated during periods in which financial shocks played a large role.

scholarly journals Effects of trend inflation on monetary policy and fiscal policy shocks in Vietnam

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Le Thanh Ha ◽  
Finch Nigel
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Money Supply ◽  
New Keynesian ◽  
Method Of Moment ◽  
Content Type ◽  
Keynesian Model ◽  
Trend Inflation ◽  
Policy Shocks ◽  
The Government

PurposeThis paper analyzes variations in effects of monetary and fiscal shocks on responses of macroeconomic variables, determinacy region and welfare costs due to changes in trend inflation.Design/methodology/approachThe authors develops the New-Keynesian model, which the central banks can employ either nominal interest rate (IR rule) or money supply (MS rule) to conduct monetary policies. They also use their budgets for capital and recurrent spending to conduct fiscal policies. By using simulated method of moment (SMM) for parameter estimation, the authors characterize Vietnam's economy during 1996Q1 -2015Q1.FindingsThe results report that consequences of monetary policy and fiscal policy shocks become more serious if there is a rise in trend inflation. Furthermore, the money supply might not be an effective instrument and using the government budget for recurrent spending produces severe consequences in the high-trend-inflation economy.Originality/valueThis is the first paper that examines the effects of trend inflation on the monetary and fiscal policy implementation in the case of Vietnam.

scholarly journals Ambiguity, Monetary Policy, and Trend Inflation

2020 ◽  
Author(s):  
Riccardo M Masolo ◽  
Francesca Monti
Keyword(s):  
Monetary Policy ◽  
New Keynesian ◽  
Inflation Expectations ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Keynesian Model ◽  
Long Run ◽  
Trend Inflation ◽  
The Us ◽  
Blue Chip

ABSTRACT Allowing for ambiguity about the behavior of the policymaker in a simple New-Keynesian model gives rise to wedges between long-run inflation expectations, trend inflation, and the inflation target. The degree of ambiguity we measure in Blue Chip survey data helps explain the dynamics of long-run inflation expectations and the inflation trend measured in the US data. Ambiguity also has implications for monetary policy. We show that it is optimal for policymakers to lean against the households’ pessimistic expectations, but also document the limits to the extent the adverse effects of ambiguity can be undone.

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