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.

scholarly journals The State of New Keynesian Economics: A Partial Assessment

2018 ◽  
Vol 32 (3) ◽  
pp. 87-112 ◽  
Author(s):  
Jordi Galí
Keyword(s):  
Interest Rates ◽  
Global Financial Crisis ◽  
Academic Research ◽  
The State ◽  
New Keynesian ◽  
Future Research ◽  
New Keynesian Model ◽  
Keynesian Economics ◽  
Keynesian Model ◽  
Dynamic Stochastic

In August 2007, when the first signs emerged of what would come to be the most damaging global financial crisis since the Great Depression, the New Keynesian paradigm was dominant in macroeconomics. Ten years later, tons of ammunition has been fired against modern macroeconomics in general, and against dynamic stochastic general equilibrium models that build on the New Keynesian framework in particular. Those criticisms notwithstanding, the New Keynesian model arguably remains the dominant framework in the classroom, in academic research, and in policy modeling. In fact, one can argue that over the past ten years the scope of New Keynesian economics has kept widening, by encompassing a growing number of phenomena that are analyzed using its basic framework, as well as by addressing some of the criticisms raised against it. The present paper takes stock of the state of New Keynesian economics by reviewing some of its main insights and by providing an overview of some recent developments. In particular, I discuss some recent work on two very active research programs: the implications of the zero lower bound on nominal interest rates and the interaction of monetary policy and household heterogeneity. Finally, I discuss what I view as some of the main shortcomings of the New Keynesian model and possible areas for future research.

scholarly journals Thai Monetary Policy Under the Inflation Targeting Regime

2020 ◽  
Author(s):  
Nipit Wongpunya
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Inflation Targeting ◽  
Aggregate Demand ◽  
State Level ◽  
Dynamic Stochastic General Equilibrium ◽  
New Keynesian ◽  
Keynesian Model ◽  
Trend Inflation ◽  
Dynamic Stochastic

Abstract This paper explores the macroeconomic effects of inflation targeting in Thailand. Furthermore, this study uses a nonlinear new Keynesian model under the dynamic stochastic general equilibrium framework with price indexation to analyze the monetary policy under inflation targeting in Thailand. The model is estimated using a Bayesian statistic for the Thai economy. It shows that inflation is more stabilized and inflation persistence has fallen after adopting inflation targeting. The paper also indicates that the Bank of Thailand is more responsive to the deviation of inflation from its target using inflation targeting. The key monetary mechanism exists through changes in the real interest rate which affect aggregate demand. It is worth noting that the larger the inflation targeting rate is, the lower the steady state output from its steady state level given no trend inflation.

Inclusion of Asset Prices: An Argument for Monetary Policy and the Phillips Curve

2018 ◽  
Vol 64 (3) ◽  
pp. 239-252
Author(s):  
Alexander Mislin
Keyword(s):  
Monetary Policy ◽  
Asset Prices ◽  
Price Index ◽  
Phillips Curve ◽  
House Prices ◽  
Optimization Procedure ◽  
New Keynesian ◽  
Keynesian Model ◽  
Consumer Prices ◽  
Dynamic Stochastic

Abstract This article develops an augmented price index that includes house prices, so that the relationship between inflation and unemployment levels in the traditional Phillips curve can be better represented. This general price index may be considered complementary to the Harmonised Index of Consumer Prices (HICP) and establishes the model-theoretical basis for a new-Keynesian model that derives the conditions for a monetary policy rule in a dynamic stochastic optimization procedure. Based on a simple stochastic differential equation for augmented inflation, we show that the reaction of the central bank depends on the marginal effects on augmented inflation and the output gap of an infinitesimal change in asset prices. This analysis could be interpreted as a way of using asset prices for a general price index, being an adequate method to restore monetary credibility. JEL classifications: E52, E58, G10 Keywords: monetary policy, asset prices, Phillips curve

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.

scholarly journals Optimal Forward Guidance

2019 ◽  
Vol 11 (4) ◽  
pp. 310-345 ◽  
Author(s):  
Florin O. Bilbiie
Keyword(s):  
Interest Rates ◽  
Dynamic Stochastic General Equilibrium ◽  
Bad News ◽  
New Keynesian ◽  
Simple Rule ◽  
New Keynesian Model ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Dynamic Stochastic

Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)

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)

THE SIGNAL EXTRACTION PROBLEM REVISITED: A NOTE ON ITS IMPACT ON A MODEL OF MONETARY POLICY

2009 ◽  
Vol 14 (3) ◽  
pp. 405-426 ◽  
Author(s):  
Benjamin D. Keen
Keyword(s):  
Monetary Policy ◽  
Imperfect Information ◽  
Dynamic Stochastic General Equilibrium ◽  
New Keynesian ◽  
Policy Changes ◽  
Keynesian Model ◽  
Dynamic Stochastic ◽  
Monetary Policy Shock ◽  
Future Policy ◽  
Sticky Wages

This paper develops a dynamic stochastic general equilibrium (DSGE) model with sticky prices and sticky wages, in which agents have imperfect information on the stance and direction of monetary policy. Agents respond by using Kalman filtering to unravel persistent and temporary monetary policy changes in order to form optimal forecasts of future policy actions. Our results show that a New Keynesian model with imperfect information and real rigidities can account for several key effects of an expansionary monetary policy shock: the hump-shaped increase in output, the delayed and gradual rise in inflation, and the fall in the nominal interest rate.

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.

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