scholarly journals The Science of Monetary Policy: An Imperfect Knowledge Perspective

2018 ◽  
Vol 56 (1) ◽  
pp. 3-59 ◽  
Author(s):  
Stefano Eusepi ◽  
Bruce Preston
Keyword(s):  
Monetary Policy ◽  
Rational Expectations ◽  
Price Level ◽  
Policy Design ◽  
Central Banks ◽  
New Keynesian ◽  
Interest Rate Policy ◽  
Imperfect Knowledge ◽  
Knowledge Perspective ◽  
Rate Policy

This paper reevaluates the basic prescriptions of monetary policy design in the new Keynesian paradigm through the lens of imperfect knowledge. We show that while the basic logic of monetary policy design under rational expectations continues to obtain, perfect knowledge and learning can limit the set of policies available to central banks, rendering expectations management in general more difficult. Nonetheless, the desirability of some form of price-level targeting, inducing inertia in interest-rate policy, paramount under rational expectations, is robust to the assumption of imperfect knowledge. (JEL D84, E13, E31, E52, E58)

scholarly journals Negative Interest Rate Risk. Atavism or Normalization of Central Banks’ Monetary Policy

2019 ◽  
Vol 3 (342) ◽  
pp. 89-116
Author(s):  
Irena Pyka ◽  
Aleksandra Nocoń
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Central Banks ◽  
Interest Rate Risk ◽  
Interest Rate Policy ◽  
Rate Policy ◽  
Negative Interest Rate Policy

In the face of the global financial crisis, central banks have used unconventional monetary policy instruments. Firstly, they implemented the interest rate policy, lowering base interest rates to a very low (almost zero) level. However, in the following years they did not undertake normalizing activities. The macroeconomic environment required further initiatives. For the first time in history, central banks have adopted Negative Interest Rate Policy (NIRP). The main aim of the study is to explore the risk accompanying the negative interest rate policy, aiming at identifying channels and consequences of its impact on the economy. The study verifies the research hypothesis stating that the risk of negative interest rates, so far unrecognized in Theory of Interest Rate, is a consequence of low effectiveness of monetary policy normalization and may adopt systemic nature, by influencing – through different channels – the financial stability and growth dynamics of the modern world economy.

scholarly journals How the World Achieved Consensus on Monetary Policy

2007 ◽  
Vol 21 (4) ◽  
pp. 47-68 ◽  
Author(s):  
Marvin Goodfriend
Keyword(s):  
Monetary Policy ◽  
New Keynesian ◽  
Complete Agreement ◽  
Success Story ◽  
Interest Rate Policy ◽  
Great Achievement ◽  
Keynesian Model ◽  
The World ◽  
Rate Policy ◽  
State Of Affairs

The worldwide progress in monetary policy is a great achievement and, especially considering the situation 30 years ago, a remarkable success story. I describe how the world achieved a working consensus on the core principles of monetary policy by the late 1990s. I survey the muddled state of affairs in the 1970s, and then ask: What happened in Federal Reserve policy to produce an understanding of the practical principles of monetary policy? How did formal institutional support for targeting low inflation abroad follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? I explain how the modern theoretical consensus—known alternatively as the New Neoclassical Synthesis or the New Keynesian model of monetary policy—reinforces key advances: the priority for price stability; the targeting of core rather than headline inflation; the importance of credibility for low inflation; and preemptive interest rate policy supported by transparent objectives and procedures. Of course, a working consensus does not constitute complete agreement. Accordingly, the conclusion identifies important monetary policy issues that remain to be explored.

ARE MAJOR CENTRAL BANKS BLINDED BY THE ANALYTICAL ELEGANCE OF THEIR MODELS? POSSIBLE COSTS OF UNCONVENTIONAL MONETARY POLICY MEASURES

2017 ◽  
Vol 62 (01) ◽  
pp. 87-108 ◽  
Author(s):  
PIOTR CIŻKOWICZ ◽  
ANDRZEJ RZOŃCAZ
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Significant Risk ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Unconventional Monetary Policy ◽  
Keynesian Model ◽  
Policy Measures ◽  
The Global Financial Crisis

We survey the possible costs of the unconventional monetary policy measures undertaken by major central banks after the outbreak of the global financial crisis in 2008. We argue that these costs are not easily discernable in the new Keynesian (NK) model, which defines a theoretical framework for monetary policy. First, the costs may result from the effects of unconventional monetary policy measures on the intensity of restructuring and the persistence of uncertainty (which increased after the outbreak of the crisis). However, neither of these processes is considered in the new Keynesian model. Second, costs may be generated not only by distortions in the choices made by economic agents but may also be a result of the decisions made by governments, particularly in terms of the fiscal deficit level. However, the new Keynesian model does not consider the effects of unconventional monetary policy measures on the quality of fiscal policy. Without carefully considering the costs, there is a significant risk that unconventional monetary policy measures could become a conventional response to recurrent crises.

scholarly journals INFLATION EXPECTATIONS AND MONETARY POLICY DESIGN: EVIDENCE FROM THE LABORATORY

2016 ◽  
Vol 22 (4) ◽  
pp. 1035-1075 ◽  
Author(s):  
Damjan Pfajfar ◽  
Blaž Žakelj
Keyword(s):  
Monetary Policy ◽  
Laboratory Experiments ◽  
Policy Design ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Central Question ◽  
Policy Regime ◽  
Expectations Formation ◽  
Reaction Coefficient ◽  
Inflation Variability

Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.

Monetary Policy's Influence on Real Estate Price in China: An Analysis Based on VAR Model

2013 ◽  
Vol 850-851 ◽  
pp. 1003-1007
Author(s):  
Xiong Song He ◽  
Guo Lin Deng
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Real Estate ◽  
Money Supply ◽  
Var Model ◽  
Response Analysis ◽  
Interest Rate Policy ◽  
The Real Estate ◽  
Real Estate Price ◽  
Rate Policy

Monetary policy has a significant effect on real estate price, and monetary policymakers need to have quick response. Based on the assumptions that monetary policy and real estate price influence each other and variables affect one another with a lag, A VAR model is designed and modified. Through impulse-response analysis and variance analysis, the influence of money supply and that of interest rate on real estate price are tested and compared. We found that: both money supply and interest rate could affect the real estate price; interest rate has a bigger influence that money supply does; as time goes on, the influence of money supply changes little, but that of interest rate enhances; interest rate policy is not easy to control and it will lead to a fluctuation of economy and the fluctuation may enhance, money supply is a better method to regulate real estate industry instead.

scholarly journals Should Inequality Factor into Central Banks' Decisions?

2020 ◽  
Vol 20 (196) ◽  
Author(s):  
Niels-Jakob Hansen ◽  
Alessandro Lin ◽  
Rui Mano
Keyword(s):  
Monetary Policy ◽  
Potential Role ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Taylor Rules ◽  
Keynesian Model

Inequality is increasingly a concern. Fiscal and structural policies are well-understood mitigators. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for monetary policy within a tractable Two-Agent New Keynesian model that captures important dimensions of inequality. We find some support for making inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules.

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