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.

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 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.

Implementation Errors and Incomplete Information

2018 ◽  
Author(s):  
Rafael Portillo ◽  
Filiz Unsal ◽  
Stephen O’Connell ◽  
Catherine Pattillo
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Incomplete Information ◽  
Low Income ◽  
Complete Information ◽  
Structural Features ◽  
New Keynesian ◽  
Low Income Countries ◽  
Keynesian Model ◽  
Policy Frameworks

This chapter shows that limited effects of monetary policy can reflect shortcomings of existing policy frameworks in low-income countries rather than (or in addition to) the structural features often put forward in policy and academic debates. The chapter focuses on two pervasive issues: lack of effective frameworks for implementing policy, so that short-term interest rates display considerable unintended volatility, and poor communication about policy intent. The authors introduce these features into an otherwise standard New Keynesian model with incomplete information. Implementation errors result from insufficient accommodation to money demand shocks, creating a noisy wedge between actual and intended interest rates. The representative private agent must then infer policy intentions from movements in interest rates and money. Under these conditions, even exogenous and persistent changes in the stance of monetary policy can have weak effects, even when the underlying transmission (as might be observed under complete information) is strong.

scholarly journals MONETARY POLICY, INFLATION AND UNEMPLOYMENT: IN DEFENSE OF THE FEDERAL RESERVE

2012 ◽  
Vol 17 (6) ◽  
pp. 1311-1329 ◽  
Author(s):  
Nicolas Groshenny
Keyword(s):  
Monetary Policy ◽  
Federal Reserve ◽  
Inflation Rate ◽  
Taylor Rule ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Sustainable Employment ◽  
Sizeable Increase ◽  
Low Rate

To what extent did deviations from the Taylor rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, I estimate a New Keynesian model with unemployment and perform a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1–2006:Q4. I find that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8% would have been as high as 80%, whereas the probability of an inflation rate above 1% would have been close to zero.

scholarly journals Government Spending Effects in a Policy Constrained Environment

2020 ◽  
Vol 20 (91) ◽  
Author(s):  
Ruoyun Mao ◽  
Shu-Chun Susan Yang
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Government Spending ◽  
New Keynesian ◽  
Policy Uncertainty ◽  
Policy Regimes ◽  
Keynesian Model ◽  
Low Interest Rates ◽  
Rate Environment

The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.

INVESTMENT AND FORWARD-LOOKING MONETARY POLICY: A WICKSELLIAN SOLUTION TO THE PROBLEM OF INDETERMINACY

2017 ◽  
Vol 22 (5) ◽  
pp. 1345-1369
Author(s):  
Stephen McKnight
Keyword(s):  
Monetary Policy ◽  
New Keynesian ◽  
Taylor Rules ◽  
Labor Supply Elasticity ◽  
New Keynesian Models ◽  
The Interest Rate ◽  
Investment Spending ◽  
Feedback Rule ◽  
Potential Remedy ◽  
Forward Looking

Recent research has shown that forward-looking Taylor rules are subject to indeterminacy in New Keynesian models with capital and investment spending. This paper shows that adopting a forward-looking Wicksellian rule that responds to the price level, rather than to inflation, is one potential remedy for the indeterminacy problem. This result is shown to be robust to variations in both the labor supply elasticity and the degree of price stickiness, the inclusion of capital adjustments costs, and if output also enters into the interest-rate feedback rule. Finally, it is shown that the superiority of Wicksellian rules over Taylor rules is not only confined to forward-looking policy, but also extends to both backward-looking and contemporaneous-looking specifications of the monetary policy rule.

scholarly journals Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

2019 ◽  
Vol 109 ◽  
pp. 427-432 ◽  
Author(s):  
Thomas M. Mertens ◽  
John C. Williams
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Inflation Targeting ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Natural Rate ◽  
Keynesian Model ◽  
Natural Rate Of Interest ◽  
Downward Bias

This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.

NKV: A New Keynesian Model with Vulnerability

2020 ◽  
Vol 110 ◽  
pp. 470-476
Author(s):  
Tobias Adrian ◽  
Fernando Duarte ◽  
Nellie Liang ◽  
Pawel Zabczyk
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Risk Taking ◽  
New Keynesian ◽  
Output Gap ◽  
New Keynesian Model ◽  
Risk Return ◽  
Keynesian Model ◽  
Price Of Risk ◽  
The Impact

We present a New Keynesian model with endogenous risk. The conditional output gap volatility depends on the price of risk, giving rise to a vulnerability channel of monetary policy. Lower interest rates not only shift consumption intertemporally but also shift conditional output risk. The model fits estimates of the conditional output gap distribution 1 to 12 quarters ahead and suggests an intertemporal risk return trade-off for policymakers. Via the impact on risk taking, easy monetary policy lowers short-term downside risks to growth but increases medium-term risks. The framework can be used to jointly consider macroprudential and monetary policy.

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