Uninsured Unemployment Risk and Optimal Monetary Policy in a Zero-Liquidity Economy

2020 ◽  
Vol 12 (2) ◽  
pp. 241-283 ◽  
Author(s):  
Edouard Challe
Keyword(s):  
Monetary Policy ◽  
Optimal Policy ◽  
Aggregate Demand ◽  
Household Wealth ◽  
Policy Response ◽  
Optimal Monetary Policy ◽  
The Face ◽  
Unemployment Risk ◽  
Effect Of Monetary Policy ◽  
Redistributive Effect

I study optimal monetary policy in a sticky-price economy wherein households precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feed back to greater unemployment risk. This deflationary spiral is constrained inefficient and calls for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept significantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. The optimal policy breaks the deflationary spiral and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark. These results are derived in an economy with zero asset supply (zero liquidity) and are thus independent of any redistributive effect of monetary policy on household wealth. (JEL E21, E24, E31, E52, G51)

OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH

2014 ◽  
Vol 19 (7) ◽  
pp. 1427-1475 ◽  
Author(s):  
Anna Lipińska
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
Nominal Exchange Rate ◽  
Nominal Interest Rate ◽  
Output Gap ◽  
Optimal Monetary Policy ◽  
Accession Countries ◽  
Dynamic Stochastic ◽  
Maastricht Criteria

This paper uses a dynamic stochastic general equilibrium model of a two-sector small open economy to analyze how the Maastricht criteria modify a fully credible optimal monetary policy in the Economic and Monetary Union accession countries. We show that if the country is not constrained by the criteria, optimal policy should stabilize fluctuations in PPI inflation, in the aggregate output gap, and in the domestic and international terms of trade. The optimal policy constrained permanently by the Maastricht criteria is characterized by reduced variability of the nominal exchange rate, CPI inflation, and the nominal interest rate and by lower optimal targets for CPI inflation and nominal interest rate. This policy results in higher variability and nonzero means for both PPI inflation and output gap, thus leading to additional, but small, welfare costs compared with the unconstrained policy.

scholarly journals Optimal Monetary Policy when Information is Market-Generated

2020 ◽  
Vol 130 (628) ◽  
pp. 956-975 ◽  
Author(s):  
Kenza Benhima ◽  
Isabella Blengini
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Optimal Policy ◽  
Labour Supply ◽  
Limited Attention ◽  
Optimal Monetary Policy ◽  
The Public ◽  
Supply Shocks ◽  
Individual Demand ◽  
Real Shocks

Abstract The nature of the private sector’s information changes the optimal conduct of monetary policy. When firms observe their individual demand and use it as a signal of real shocks, the optimal policy consists in maximising the information content of that signal. When real shocks are deflationary (like labour supply shocks), the optimal policy is countercyclical and magnifies price movements, which contrasts with the exogenous information case, where optimal monetary policy is procyclical and stabilises prices. When the central bank communicates its information to the public, this policy is still optimal if firms pay limited attention to central bank announcements.

Testing monetary policy optimality using volatility outcomes: a novel approach

2016 ◽  
Vol 16 (2) ◽  
Author(s):  
Federico Ravenna
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
The United States ◽  
New Keynesian ◽  
Model Parameters ◽  
Dsge Models ◽  
Optimal Monetary Policy ◽  
Novel Approach ◽  
Interest Rate Volatility

AbstractWe propose a method to assess the efficiency of macroeconomic outcomes using the restrictions implied by optimal policy DSGE models for the volatility of observable variables. The method exploits the variation in the model parameters, rather than random deviations from the optimal policy. In the new Keynesian business cycle model this approach shows that optimal monetary policy imposes tighter restrictions on the behavior of the economy than is readily apparent. The method suggests that for the historical output, inflation and interest rate volatility in the United States over the 1984–2005 period to be generated by any optimal monetary policy with a high probability, the observed interest rate time series should have a 25% larger variance than in the data.

scholarly journals Robustly Optimal Monetary Policy with Near-Rational Expectations

2010 ◽  
Vol 100 (1) ◽  
pp. 274-303 ◽  
Author(s):  
Michael Woodford
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Optimal Policy ◽  
Rational Expectations ◽  
Stabilization Policy ◽  
Optimal Monetary Policy ◽  
Inflation Target ◽  
Model Consistency ◽  
Long Run

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. (JEL C62, D84, E13, E31, E32, E52)

scholarly journals RESPON KEBIJAKAN MONETER YANG OPTIMAL DI INDONESIA: The State-Contingent Rule?

2008 ◽  
Vol 10 (4) ◽  
Author(s):  
Solikin M. Juhro
Keyword(s):  
Monetary Policy ◽  
Structural Changes ◽  
Structural Model ◽  
Vector Autoregression ◽  
Policy Response ◽  
Optimal Monetary Policy ◽  
Cointegrating Vector ◽  
Long Run ◽  
Policy Variable ◽  
Short Run

By developing a long-run macro structural model, The Structural Cointegrating Vector Autoregression (VAR), the optimality principle of monetary policy response in Indonesia is formulated. It accommodates not only long-run policy response and short-run dynamic errorcorrection mechanism, but also specific shocks emerged due to structural changes in the economy. In that context, the generated policy response basically reflects the optimal response of a “state-contingent rule”, different from common simple policy rules, such as Taylor rule and McCallum rule. This study captures several important aspects related to the implementation of “state-contingent rule” as an optimal monetary policy in Indonesia, namely: (i) the superiority of interest rate as a policy variable, or an operational target, against monetary base, (ii) the identification of monetary policy lag which is estimated averagely one-and-a half year, and (iii) the sub optimality of central bank monetary policy response, attributed by an over tight or loose policy response.JEL Classification: C32, E52Keywords: Kebijakan Moneter di Indonesia, Respon Kebijakan Moneter, Structural Cointegration Vector Autoregression(VAR).

scholarly journals Monetary Policy and Rational Asset Price Bubbles

2014 ◽  
Vol 104 (3) ◽  
pp. 721-752 ◽  
Author(s):  
Jordi Galí
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Aggregate Demand ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Monetary Policies ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Price Bubble ◽  
The Impact

I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for “leaning against the wind” monetary policies. (JEL E13, E32, E44, E52, G12)

scholarly journals The distortionary effect of monetary policy: credit expansion vs. lump-sum transfers in the lab

2018 ◽  
Vol 18 (2) ◽  
Author(s):  
Romain Baeriswyl ◽  
Camille Cornand
Keyword(s):  
Monetary Policy ◽  
General Equilibrium ◽  
Credit Expansion ◽  
Real Effect ◽  
Relative Prices ◽  
Lump Sum ◽  
Monetary Transfers ◽  
Effect Of Monetary Policy ◽  
Redistributive Effect

Abstract In an experimental monetary general equilibrium economy, we assess two processes of monetary injection: credit expansion vs. lump-sum monetary transfers. In theory, both processes are neutral and exert no real effect on allocation. In the experiment, however, credit expansion leads to substantial distortions of real allocation and relative prices, and exerts a redistributive effect across subjects. By contrast, an increase in money through lump-sum transfers does not distort real allocation.

Optimal Monetary Policy Rules in an Estimated Sticky-Information Model

2009 ◽  
Vol 1 (2) ◽  
pp. 1-28 ◽  
Author(s):  
Ricardo Reis
Keyword(s):  
Monetary Policy ◽  
Optimal Policy ◽  
Price Level ◽  
Dynamic Stochastic General Equilibrium ◽  
Optimal Monetary Policy ◽  
Sticky Information ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Interest Rate Rule ◽  
Dynamic Stochastic

This paper uses a dynamic stochastic general equilibrium (DSGE) model with sticky information as a laboratory to study monetary policy. It characterizes the model's predictions for macro dynamics and optimal policy at prior parameters, and then uses data on five US macroeconomic series to update the parameters and provide an estimated model that can be used for policy analysis. The model answers a few policy questions. How does sticky information affect optimal monetary policy? What is the optimal interest rate rule? What is the optimal elastic price-level targeting rule? How does parameter uncertainty affect optimal policy? Are the conclusions for the Euro area different? (JEL E13, E31, E43, E52)

scholarly journals Optimal Monetary Policy Under Bounded Rationality

2019 ◽  
Vol 19 (166) ◽  
Author(s):  
Jonathan Benchimol ◽  
Lahcen Bounader
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Optimal Policy ◽  
Inflation Targeting ◽  
Price Level ◽  
Inflation Expectations ◽  
Optimal Monetary Policy ◽  
Policy Regime ◽  
Welfare Losses ◽  
Simple Rules

The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.

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