scholarly journals Discretionary policy and multiple equilibria in a new Keynesian model

2019 ◽  
Author(s):  
Volker Hahn
Keyword(s):  
Rational Expectations ◽  
Multiple Equilibria ◽  
Alternative Explanation ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Economic Fundamentals ◽  
Keynesian Model ◽  
Endogenous Variables ◽  
New Policies ◽  
High Degree

Abstract We show that discretionary policymaking can lead to multiple rational-expectations equilibria where the central bank responds to inflation sentiments, which are driven by past endogenous variables but are unrelated to current economic fundamentals. Some of these equilibria have favourable consequences for welfare, resulting in outcomes superior even to those achieved under timeless-perspective commitment. Inflation sentiments also provide a novel explanation for the sizeable macroeconomic fluctuations in many countries in the 1970s. Compared to interest-rate rules violating the Taylor principle, our explanation has the advantage of providing a rationale for why central banks that are confronted with inefficiently large macroeconomic fluctuations may not be able to deviate to new policies with superior macroeconomic outcomes. Moreover, we show that our approach provides an alternative explanation for the high degree of inflation persistence found in the data.

INTEREST RATE RULES AND EQUILIBRIUM STABILITY UNDER DEEP HABITS

2013 ◽  
Vol 18 (1) ◽  
pp. 23-40 ◽  
Author(s):  
Sarah Zubairy
Keyword(s):  
Interest Rate ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Interest Rate Rules ◽  
Keynesian Model ◽  
Interest Rate Rule ◽  
Countercyclical Markups ◽  
High Degree ◽  
Very High

This paper studies the determinacy of equilibrium in a new Keynesian model with deep habits under different interest rate rules. The main finding is that an interest rate rule satisfying the Taylor principle is no longer a sufficient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly enlarges the regions of determinacy. However, under all the simple interest rate rules considered, determinacy is not guaranteed for a very high degree of deep habits. Deep habits give rise to countercyclical markups, which is in line with empirical evidence and makes them an appealing feature in the study of demand shocks. The countercyclicality of markups also leads to multiple equilibria because of self-fulfilling expectations for a high degree of deep habit formation.

scholarly journals Walk on the Wild Side: Temporarily Unstable Paths and Multiplicative Sunspots

2019 ◽  
Vol 109 (5) ◽  
pp. 1805-1842 ◽  
Author(s):  
Guido Ascari ◽  
Paolo Bonomolo ◽  
Hedibert F. Lopes
Keyword(s):  
Stochastic Volatility ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Dynamics ◽  
Generalized Model ◽  
Keynesian Model

We propose a generalization of the rational expectations framework to allow for temporarily unstable paths. Our approach introduces multiplicative sunspot shocks and it yields drifting parameters and stochastic volatility. Then, we provide an econometric strategy to estimate this generalized model on the data. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy, and temporary instability. We apply our methodology to US inflation dynamics in the 1970s through the lens of a simple New Keynesian model. When temporarily unstable paths are allowed, the data unambiguously select them to explain the stagflation period in the 1970s. (JEL D84, E12, E31, E32, E52)

scholarly journals RAMSEY OPTIMAL POLICY IN THE NEW-KEYNESIAN MODEL WITH PUBLIC DEBT

2021 ◽  
pp. 1-27
Author(s):  
Jean-Bernard Chatelain ◽  
Kirsten Ralf
Keyword(s):  
Public Debt ◽  
Optimal Policy ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Simple Rules ◽  
Debt Dynamics ◽  
Level Versus ◽  
The Interest Rate

In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-rule parameter implies the local stability of public-debt dynamics (“passive” fiscal policy).

scholarly journals The effect of central bank credibility on forward guidance in an estimated New Keynesian model

2021 ◽  
pp. 1-39
Author(s):  
Stephen J. Cole ◽  
Enrique Martínez-García
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
The Us ◽  
Imperfect Credibility ◽  
Central Bank Credibility

Abstract This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

A NOTE ON THE UNIQUENESS OF STEADY-STATE EQUILIBRIUM UNDER STATE-DEPENDENT WAGE SETTING

2020 ◽  
pp. 1-12
Author(s):  
Shuhei Takahashi
Keyword(s):  
Steady State ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
Wage Setting ◽  
State Equilibrium ◽  
Strategic Complementarity ◽  
State Dependent ◽  
Keynesian Model ◽  
Fixed Wage ◽  
Parameter Values

Does wage setting exhibit strategic complementarity and produce multiple equilibria? This study constructs a discrete-time New Keynesian model in which households choose the timing of their wage adjustments endogenously subject to fixed wage-setting costs. I explore steady-state equilibrium of the state-dependent wage-setting model both analytically and numerically. For reasonable parameter values, complementarity in wage setting is weak and the steady-state equilibrium is unique.

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 The implementation of stabilization policy

2021 ◽  
Vol 16 (2) ◽  
pp. 677-716
Author(s):  
Olivier Loisel
Keyword(s):  
Rational Expectations ◽  
Local Equilibrium ◽  
Policy Instrument ◽  
New Keynesian ◽  
Stabilization Policy ◽  
Keynesian Model ◽  
Dynamic Stochastic ◽  
Business Cycle Model ◽  
Feasible Path

In locally linearized dynamic stochastic rational‐expectations models, I introduce the concepts of feasible paths (paths on which the policy instrument can be expressed as a function of the policymaker's observation set) and implementable paths (paths that can be obtained, in a minimally robust way, as the unique local equilibrium under a policy‐instrument rule consistent with the policymaker's observation set). I show that, for relevant observation sets, the optimal feasible path under monetary policy can be non‐implementable in the new Keynesian model, while constant‐debt feasible paths under tax policy are always implementable in the real business cycle model. The first result sounds a note of caution about one of the main lessons of the new Keynesian literature, namely the importance for central banks to track some key unobserved exogenous rates of interest, while the second result restores to some extent the role of income or labor‐income taxes in safely stabilizing public debt. For any given implementable path, I show how to design arithmetically a policy‐instrument rule consistent with the policymaker's observation set and implementing this path as the robustly unique local equilibrium.

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.

A NOTE ON TREND GROWTH AND LEARNING ABOUT MONETARY POLICY RULES IN A TWO-BLOCK WORLD ECONOMY

2015 ◽  
Vol 21 (1) ◽  
pp. 243-258
Author(s):  
Eric Schaling ◽  
Mewael F. Tesfaselassie
Keyword(s):  
Monetary Policy ◽  
Rational Expectations ◽  
World Economy ◽  
New Keynesian ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Elasticity Of Intertemporal Substitution ◽  
Keynesian Model ◽  
Long Run ◽  
Trend Growth

We analyze the implications of openness and growth for determinacy and learnability of rational expectations equilibria in a two-country New Keynesian model with alternative monetary policy rules. Under the contemporaneous data rule, the conditions for determinacy and learnability become more stringent as a result of openness but less stringent as a result of growth, so that growth weakens the effect of openness. Under the expectations-based rule, the conditions for determinacy and learnability also become more stringent as a result of openness, whereas as a result of trend growth the conditions for determinacy also become more stringent (thus reinforcing the effect of openness) but those for learnability become less stringent (thus weakening the effect of openness). As in related studies, the elasticity of intertemporal substitution is key to our result, but within a framework that is consistent with long-run labor supply and balanced growth facts.

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