Optimal Inflation for the US Economy

2011 ◽  
Vol 3 (3) ◽  
pp. 29-52 ◽  
Author(s):  
Roberto M Billi
Keyword(s):  
Inflation Rate ◽  
Low Cost ◽  
Policy Instrument ◽  
New Keynesian ◽  
Worst Case ◽  
Us Economy ◽  
Keynesian Model ◽  
Long Run ◽  
The Us ◽  
The Government

This paper studies the optimal long-run inflation rate (OIR) in a small New Keynesian model, where the only policy instrument is a short-term nominal interest rate that may occasionally run against a zero lower bound (ZLB). The model allows for worst-case scenarios of misspecification. The analysis shows first, if the government optimally commits, the OIR is below 1 percent annually. Second, if the government re-optimizes each period, the OIR rises markedly to 17 percent. Third, if the government commits only to an inertial Taylor rule, the inflation bias is eliminated at very low cost in terms of welfare for the representative household. (JEL E12, E31, E43, E52, E58)

scholarly journals SECTORAL LABOR MOBILITY AND OPTIMAL MONETARY POLICY

2021 ◽  
pp. 1-34
Author(s):  
Alessandro Cantelmo ◽  
Giovanni Melina
Keyword(s):  
Labor Mobility ◽  
Central Banks ◽  
New Keynesian ◽  
Optimal Monetary Policy ◽  
Relative Prices ◽  
Optimal Weights ◽  
Us Economy ◽  
Keynesian Model ◽  
Inflation Rates ◽  
The Us

How should central banks optimally aggregate sectoral inflation rates in the presence of imperfect labor mobility across sectors? We study this issue in a two-sector New-Keynesian model and show that a lower degree of sectoral labor mobility, ceteris paribus, increases the optimal weight on inflation in a sector that would otherwise receive a lower weight. We analytically and numerically find that, with limited labor mobility, adjustment to asymmetric shocks cannot fully occur through the reallocation of labor, thus putting more pressure on wages, causing inefficient movements in relative prices, and creating scope for central bank’ s intervention. These findings challenge standard central banks’ practice of computing sectoral inflation weights based solely on sector size and unveil a significant role for the degree of sectoral labor mobility to play in the optimal computation. In an extended estimated model of the US economy, featuring customary frictions and shocks, the estimated inflation weights imply a decrease in welfare up to 10% relative to the case of optimal weights.

JOB TURNOVER, TREND GROWTH, AND THE LONG-RUN PHILLIPS CURVE

2016 ◽  
Vol 21 (4) ◽  
pp. 835-861 ◽  
Author(s):  
Dennis J. Snower ◽  
Mewael F. Tesfaselassie
Keyword(s):  
Inflation Rate ◽  
Phillips Curve ◽  
New Keynesian ◽  
Job Turnover ◽  
Turnover Rates ◽  
Positive Effects ◽  
Keynesian Model ◽  
Long Run ◽  
Productive Growth ◽  
Trend Growth

The paper reexamines the long-run Phillips curve in a New Keynesian model with job turnover and trend productivity growth. We show that an increase in money growth has substantial positive effects on steady state output, consumption, and employment in the presence of (i) observed job turnover rates and, if consumption smoothing is sufficiently strong, (ii) observed productive growth rates. Furthermore, we show that the optimal inflation rate is slightly under 2% for reasonable calibrations of job turnover and trend growth.

Is risk shock a key factor driving business cycles in China?

2017 ◽  
Vol 19 (1) ◽  
Author(s):  
Zhe Li ◽  
Shuixing Luo
Keyword(s):  
Business Cycles ◽  
Chinese Economy ◽  
New Keynesian ◽  
Macroeconomic Policies ◽  
Us Economy ◽  
Keynesian Model ◽  
The Us ◽  
Key Factor ◽  
Investment Capital ◽  
The Impact

Abstract This paper studies the impact of risk shock on the Chinese economy using a New-Keynesian model with financial frictions. The study shows that risk shock is an important driving force for the fluctuations of GDP, investment, capital, credit, and credit spread in China. However, the role of risk shock in driving China’s business cycles is not as crucial as in the US economy (see Christiano, Motto, and Rostagno 2014). There are three main reasons that explain the different performance of risk shocks in China and the US: the volatility of risk shock, the effect of equity shock, and the influence of macroeconomic policies are all different in China and in the US. Our paper contributes to an understanding of the business cycles in China during the period from 1999 to 2015, particularly in comparison with business cycles in the US.

ON PHASE SHIFTS IN A NEW KEYNESIAN MODEL ECONOMY

2020 ◽  
pp. 1-22
Author(s):  
Xue Li ◽  
Joseph H. Haslag
Keyword(s):  
Phase Shift ◽  
Government Spending ◽  
Inflation Rate ◽  
Price Level ◽  
New Keynesian ◽  
Price Stickiness ◽  
Keynesian Model ◽  
The Government ◽  
The One ◽  
Identification Mechanism

The purpose of this paper is to focus directly on the phase shift. For one thing, we ask whether a New Keynesian sticky-price model economy can account for both countercyclical prices and procyclical inflation. We present findings in which the price level is countercyclical and the inflation rate is procyclical. We proceed to use the model economy as an identification mechanism. What set of individual shocks are necessary to account for the phase shift? That set contains the price markup shock. Next, we ask what set of shocks are sufficient to account for the phase shift. This set contains three elements: the price markup and wage markup shocks along with the government spending shock. The results are important as a building block. We infer that price stickiness is an important model feature; without price stickiness, we are in the real business cycle economies that Cooley and Hansen studied. But, it raises further questions. For instance, is price stickiness of the Calvo form—the one used here—necessary to explain the phase shift?

The Young, the Old, and the Government: Demographics and Fiscal Multipliers

2021 ◽  
Vol 13 (4) ◽  
pp. 110-141
Author(s):  
Henrique S. Basso ◽  
Omar Rachedi
Keyword(s):  
Open Economy ◽  
Government Spending ◽  
Population Aging ◽  
Supply And Demand ◽  
New Keynesian ◽  
Fiscal Multipliers ◽  
Keynesian Model ◽  
The Us ◽  
The Government ◽  
Labor Supply And Demand

We document that government spending multipliers depend on the population age structure. Using the variation in military spending and birth rates across US states, we show that the local fiscal multiplier is 1.5 and increases with the population share of young people, implying multipliers of 1.1–1.9 in the interquartile range. A parsimonious life cycle open economy New Keynesian model with credit market imperfections and age-specific differences in labor supply and demand explains 87 percent of the relationship between local multipliers and demographics. The model implies that the US population aging between 1980 and 2015 caused a 38 percent drop in national government spending multipliers. (JEL D15, E12, E24, E62, J11, J22, J23)

scholarly journals Fiscal Volatility Shocks and Economic Activity

2015 ◽  
Vol 105 (11) ◽  
pp. 3352-3384 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Pablo Guerrón-Quintana ◽  
Keith Kuester ◽  
Juan Rubio-Ramírez
Keyword(s):  
Adverse Effect ◽  
Economic Activity ◽  
The United States ◽  
New Keynesian ◽  
Time Varying ◽  
New Keynesian Model ◽  
Us Economy ◽  
Keynesian Model ◽  
The Us ◽  
Previous Step

We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism. (JEL E12, E23, E32, E52, E62)

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.

scholarly journals Co-integration with score-driven models: an application to US real GDP growth, US inflation rate, and effective federal funds rate

2021 ◽  
pp. 1-21
Author(s):  
Szabolcs Blazsek ◽  
Alvaro Escribano ◽  
Adrian Licht
Keyword(s):  
Inflation Rate ◽  
Predictive Accuracy ◽  
Moving Average ◽  
Impulse Response Functions ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Vector Autoregressive ◽  
Autoregressive Moving Average Model ◽  
Long Run ◽  
The Us

Abstract Nonlinear co-integration is studied for score-driven models, using a new multivariate dynamic conditional score/generalized autoregressive score model. The model is named t-QVARMA (quasi-vector autoregressive moving average model), which is a location model for the multivariate t-distribution. In t-QVARMA, I(0) and co-integrated I(1) components of the dependent variables are included. For t-QVARMA, the conditions of the maximum likelihood estimator and impulse response functions (IRFs) are presented. A limiting special case of t-QVARMA, named Gaussian-QVARMA, is a Gaussian-VARMA specification with I(0) and I(1) components. As an empirical application, the US real gross domestic product growth, US inflation rate, and effective federal funds rate are studied for the period of 1954 Q3 to 2020 Q2. Statistical performance and predictive accuracy of t-QVARMA are superior to those of Gaussian-VAR. Estimates of the short-run IRF, long-run IRF, and total IRF impacts for the US data are reported.

Monetary Policy and Asset Price Gap Signal Technology in a New Keynesian Framework

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Alexander Mislin
Keyword(s):  
Inflation Rate ◽  
Asset Price ◽  
New Keynesian ◽  
Adjustment Process ◽  
Keynesian Model ◽  
Nominal Rate ◽  
Dynamic Stochastic ◽  
The Difference ◽  
Fundamental Value ◽  
Output Gaps

Abstract This article develops a New Keynesian model in which the inflation rate depends on the present value of future output gaps and asset prices gaps. The latter follows a price adjustment process. These asset price gaps are driven by ‛asset price gap signal technology’, a measure of exponentially distributed asset price gaps with a signalling mechanism. Within a dynamic stochastic optimisation approach, I identify a policy rule for the central bank in which the asset price gap the difference between the actual asset price at time t to its fundamental value plays a crucial role in determining the nominal rate of interest.

Optimal fiscal and monetary policy under different fiscal instruments

2020 ◽  
Vol 48 (1) ◽  
pp. 167-190
Author(s):  
Mehrab Kiarsi
Keyword(s):  
Monetary Policy ◽  
Inflation Rate ◽  
Dynamic Properties ◽  
Sticky Prices ◽  
New Keynesian ◽  
Content Type ◽  
Friedman Rule ◽  
Keynesian Model ◽  
Fiscal And Monetary Policy ◽  
Cash In Advance

PurposeThe paper includes characterizing Ramsey policy in a cash-in-advance monetary model, under flexible and sticky prices, and with different fiscal instruments.Design/methodology/approachThe paper analytically and numerically characterizes the dynamic properties of Ramsey allocations. The author computes dynamics by solving second-order approximations to the Ramsey planner’s policy functions around a non-stochastic Ramsey steady state.FindingsThe Friedman rule is not mainly optimal in a cash-in-advance model with distorting taxes. The Ramsey-optimal policy with both taxes on income and consumption calls for a high inflation rate that is extremely volatile, despite the fact that changing prices is costly.Practical implicationsThe optimality of zero nominal interest rate under flexible prices in monetary models is not mainly the case and quite depends on the preferences. The optimality of a zero inflation rate under sticky prices also very much depends on the assumed set of fiscal instruments.Originality/valueThe non-optimality of the Friedman rule under flexible prices is quite new. Moreover, studying the optimal fiscal and monetary policy in a New Keynesian model with a rich set of fiscal instruments is also quite original.

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