NEWS SHOCKS AND THE EFFECTS OF MONETARY POLICY

2021 ◽  
pp. 1-41
Author(s):  
Ren Zhang
Keyword(s):  
New Keynesian ◽  
Monetary Shocks ◽  
Structural Vector Autoregression ◽  
News Shocks ◽  
Policy Regime ◽  
Future Technology ◽  
Keynesian Model ◽  
Svar Model ◽  
News Shock ◽  
Monetary Shock

Traditionally identified monetary shocks in a structural vector autoregression (SVAR) model typically result in long-lasting effects on output and total factor productivity (TFP). In this paper, I argue that the typical monetary shock has been confounded with the news shock about future technology. I propose and implement a novel SVAR approach that effectively “cleans” the technology component from the traditional Cholesky monetary shock. With the new identification, I find that a monetary shock exerts smaller and less persistent effects on output and the level of measured TFP than a traditionally identified monetary shock. Finally, I show that the SVAR impulse responses can be replicated by augmenting the standard New Keynesian model with a time-varying inflation target and a non-Ricardian fiscal policy regime.

scholarly journals Financial Heterogeneity and the Investment Channel of Monetary Policy

Econometrica ◽  
2020 ◽  
Vol 88 (6) ◽  
pp. 2473-2502
Author(s):  
Pablo Ottonello ◽  
Thomas Winberry
Keyword(s):  
Monetary Policy ◽  
Default Risk ◽  
Firm Heterogeneity ◽  
New Keynesian ◽  
Cost Curve ◽  
Monetary Shocks ◽  
Keynesian Model ◽  
Aggregate Effect ◽  
Heterogeneous Firm ◽  
Effect Of Monetary Policy

We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk—those with low debt burdens and high “distance to default”— are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low‐risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.

scholarly journals Monetary policy and news shocks: are Taylor rules forward-looking?

2016 ◽  
Vol 16 (2) ◽  
Author(s):  
Gabriela Best ◽  
Pavel Kapinos
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Taylor Rule ◽  
New Keynesian ◽  
Monetary Shocks ◽  
Taylor Rules ◽  
Macroeconomic Conditions ◽  
Econometric Methods ◽  
Keynesian Model ◽  
Forward Looking

AbstractThis paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model’s fit to the US data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

Endogenous Technological Change and the New Keynesian Model

2020 ◽  
pp. 1-45
Author(s):  
Toshihiro Okada
Keyword(s):  
Lower Bound ◽  
Technological Change ◽  
Interest Rates ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Endogenous Technological Change ◽  
Keynesian Model ◽  
Supply Shock ◽  
News Shock ◽  
Endogenous Technology

This paper develops and estimates a new Keynesian (NK) model with endogenous technology. It shows that introducing endogenous technology can solve three important puzzles faced by conventional NK models: the “inflation persistence”, “disinflationary news shock”, and “zero lower bound (ZLB) supply shock” puzzles. First, the observed persistence in inflation is explained without relying on the conventional NK models' additional assumptions, e.g., backward price indexation. Second, it explains the observed disinflationary effect of a news shock. Third, the model avoids the conventional NK models' paradoxical, empirically inconsistent prediction that a negative supply shock is expansionary at the ZLB on interest rates.

scholarly journals STRUCTURAL STABILITY OF THE GENERALIZED TAYLOR RULE

2017 ◽  
Vol 23 (4) ◽  
pp. 1664-1678
Author(s):  
William A. Barnett ◽  
Evgeniya A. Duzhak
Keyword(s):  
Regime Switching ◽  
Taylor Rule ◽  
Period Doubling ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Policy Regime ◽  
Keynesian Model ◽  
Small Change ◽  
Monetary Models ◽  
Active Policy

This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coefficients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the possibility of a period-doubling bifurcation. As a result, a small change in the parameters (e.g., a more active policy response) can lead to a drastic change in the path of inflation. We show that the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations. A New Keynesian model with a hybrid rule, however, exhibits the same pattern of period-doubling bifurcations as the analysis with a simple monetary rule.

scholarly journals Oil and Macroeconomic (In)Stability

2018 ◽  
Vol 10 (4) ◽  
pp. 128-151 ◽  
Author(s):  
Hilde C. Bjørnland ◽  
Vegard H. Larsen ◽  
Junior Maih
Keyword(s):  
Rational Expectation ◽  
Price Volatility ◽  
Oil Price ◽  
New Keynesian ◽  
Oil Price Shocks ◽  
Great Moderation ◽  
Price Shocks ◽  
Policy Regime ◽  
Oil Price Volatility ◽  
Keynesian Model

We analyze the role of oil price volatility in reducing US macroeconomic instability. Using a Markov Switching Rational Expectation New Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role. (JEL E12, E23, E52, Q35, Q43)

A NOTE ON BUSINESS-CYCLE PROPERTIES IN FRICTIONAL LABOR MARKETS

2018 ◽  
Vol 22 (5) ◽  
pp. 1370-1389
Author(s):  
Chia-Hui Lu
Keyword(s):  
Labor Markets ◽  
New Keynesian ◽  
Wage Rigidity ◽  
Search Model ◽  
Extensive Margin ◽  
Keynesian Model ◽  
Productivity Shock ◽  
Monetary Shock ◽  
Labor Market Dynamics ◽  
Real Wage Rigidity

This paper builds a standard search model with flexible prices and wages, and extensive and intensive labor adjustments. Money is introduced into the model through a cash-in-advance constraint in which only consumption is cash constrained. The model reproduces labor-market dynamics under a productivity shock and/or a monetary shock. I can replicate the Beveridge and Phillips curves that are observed in the data, and do not need to rely on the New Keynesian model or real wage rigidity. I find that the nonexistence of an extensive margin and different money mechanisms, such as cash constraints on investment and money in the utility function, do not change the above replications. Furthermore, I can still replicate the Beveridge curve even without money or with rigid prices.

WHAT WE DON'T KNOW ABOUT THE MONETARY TRANSMISSION MECHANISM AND WHY WE DON'T KNOW IT

2008 ◽  
Vol 12 (S1) ◽  
pp. 60-74 ◽  
Author(s):  
ANDREAS BEYER ◽  
ROGER E.A. FARMER
Keyword(s):  
Rational Expectations ◽  
Transmission Mechanism ◽  
New Keynesian ◽  
Monetary Transmission ◽  
Reduced Form ◽  
New Keynesian Model ◽  
Policy Rule ◽  
Policy Regime ◽  
Equivalent Models ◽  
Keynesian Model

We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Jess Benhabib and Roger Farmer is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models havedifferentimplications for the design of an optimal policy rule.

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