scholarly journals Limited Information and the Relation Between the Variance of Inflation and the Variance of Output in a New Keynesian Perspective

2019 ◽  
Vol 14 (PNEA) ◽  
pp. 541-557
Author(s):  
Alejandro Rodríguez Arana
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Social Welfare ◽  
Central Bank ◽  
Loss Function ◽  
Efficient Frontier ◽  
New Keynesian ◽  
Limited Information ◽  
The Interest Rate

The objective of this paper is to analyze the effects on welfare of a monetary policy that establishes the reference interest rate at discrete intervals of time. The hypothesis is that because there is uncertainty about various disturbances that will occur in the period in which the referential interest rate is established, this can cause a loss of social welfare. To analyze the problem, a model is proposed where the central bank minimizes a loss function. When there is perfect certainty, an efficient frontier between the variances of inflation and output is reached. With uncertainty the result is inefficient. This implies the need to discuss whether it would be convenient for the interest rate to be set contingently. The main limitation of the work is perhaps that the model used makes a large number of abstractions, which allows it to be functional, but can leave out important aspects of reality. There seems to be very few papers, in any, that deal with the problem addressed in this work

scholarly journals ROBUST MONETARY POLICY IN A NEW KEYNESIAN MODEL WITH IMPERFECT INTEREST RATE PASS-THROUGH

2015 ◽  
Vol 20 (6) ◽  
pp. 1504-1526 ◽  
Author(s):  
Rafael Gerke ◽  
Felix Hammermann
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Model Misspecification ◽  
New Keynesian ◽  
Optimal Monetary Policy ◽  
Loan Rate ◽  
Keynesian Model ◽  
Pass Through ◽  
Policy Shifts

We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. We find that, first, whether robust optimal monetary policy under commitment responds more cautiously or more aggressively depends crucially on the source of shock. Imperfect pass-through amplifies the robust policy. Second, if the central bank is concerned about uncertainty, it dampens volatility in the inflation rate preemptively but accepts higher volatility in the output gap and loan rate. However, for highly sticky loan rates, insurance against model misspecification becomes particularly pricy. Third, if the central bank fears uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilization away from inflation.

PARAMETER UNCERTAINTY AND NONLINEAR MONETARY POLICY RULES

2010 ◽  
Vol 15 (2) ◽  
pp. 184-200 ◽  
Author(s):  
Peter Tillmann
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Empirical Evidence ◽  
Parameter Uncertainty ◽  
Phillips Curve ◽  
Optimal Monetary Policy ◽  
Worst Case ◽  
Rate Adjustment ◽  
The Interest Rate

Empirical evidence suggests that the instrument rule describing the interest rate–setting behavior of the Federal Reserve is nonlinear. This paper shows that optimal monetary policy under parameter uncertainty can motivate this pattern. If the central bank is uncertain about the slope of the Phillips curve and follows a min–max strategy to formulate policy, the interest rate reacts more strongly to inflation when inflation is further away from target. The reason is that the worst case the central bank takes into account is endogenous and depends on the inflation rate and the output gap. As inflation increases, the worst-case perception of the Phillips curve slope becomes larger, thus requiring a stronger interest rate adjustment. Empirical evidence supports this form of nonlinearity for post-1982 U.S. data.

Money and Credit in the New Keynesian Model

2014 ◽  
Vol 65 (3) ◽  
Author(s):  
Sven Offick ◽  
Hans-Werner Wohltmann
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Banking Sector ◽  
New Keynesian ◽  
Credit Channel ◽  
New Keynesian Model ◽  
Static Approximation ◽  
Keynesian Model ◽  
The Interest Rate

AbstractThis paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household’s utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank’s instrument variables are the monetary base and the refinancing rate, i. e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to BERNANKE and BLINDER (1988) - the credit channel may also dampen the output effects of monetary disturbances. The expansionary effects of a monetary expansion may be substantially diminished if the monetary disturbance is accompanied by a contractionary credit shock. In a dynamic version of our model, in which expectations are formed endogenously, we find that the credit channel amplifies output responses.

scholarly journals The Impact of Electronic Money on Monetary Policy: Based on DSGE Model Simulations

Mathematics ◽  
2021 ◽  
Vol 9 (20) ◽  
pp. 2614
Author(s):  
Sumei Luo ◽  
Guangyou Zhou ◽  
Jinpeng Zhou
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
New Keynesian ◽  
Dsge Model ◽  
Economic Sectors ◽  
Electronic Money ◽  
Savings And Loans ◽  
Interactive Relationship ◽  
The Interest Rate ◽  
The Impact

Starting with the interactive relationship between electronic money and household consumption stimuli, this paper deeply analyzes the changes in the behavior of each monetary subject under the impact of electronic money, and establishes a DSGE model based on the three economic sectors of family, commercial bank and central bank under the New Keynesian framework. On this basis, the impact of electronic money on savings, loans, output and the interest rate, and its impact on monetary policy, are described by numerical simulation. The simulation results show that: (1) electronic money has asymmetric effects on savings and loans, but an irrational deviation on households; (2) the influence of electronic money on the interest rate has a reverse effect, and the “inverse adjustment” of the interest rate increases the management difficulty of the micro subject to a certain extent, and affects the effectiveness of monetary policy; (3) the regulatory effect of price monetary policy is better than that of quantitative monetary policy, and electronic money has the effect of its risk restraining impact. Finally, based on the analysis, this paper gives policy recommendations.

Dynamics of Monetary Policy in Kenya

2021 ◽  
pp. 281-303
Author(s):  
Esman Nyamongo ◽  
Isaya Maana ◽  
Anne Kamau
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Detailed Analysis ◽  
Inflation Targeting ◽  
50Th Anniversary ◽  
Historical Events ◽  
Policy Practice ◽  
The Interest Rate ◽  
Forward Looking

This chapter provides a chronicle of monetary policy phases and outcomes in Kenya since the establishment of the Central Bank of Kenya in 1966. After detailed analysis of historical events and data spanning 50 years, it is found that monetary policy has evolved from an era of rudimentary monetary policy practice, a backward-looking monetary policy to a regime that is forward-looking, best characterized as transitioning to inflation targeting. During the 50 year journey, the Bank has made major milestones in the formulation of monetary policy. However, the interest rate capping law that came into force in September 2016, as the Bank celebrated its 50th anniversary, posed a threat to the achievements. The Central Bank was keen on having it repealed and this was attained in November 2019.

On the Role of Money Targets in the Monetary Policy Framework in SSA

2018 ◽  
Author(s):  
Andrew Berg ◽  
Rafael Portillo ◽  
Filiz Unsal
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Low Income ◽  
New Keynesian ◽  
Policy Framework ◽  
Low Income Countries ◽  
Money Growth ◽  
Ex Post ◽  
Monetary Policy Framework

Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This chapter extends the New Keynesian model to provide a role for ‘M’ in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issue in these countries. Ex ante announcements and forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex post, the policymaker must choose his relative adherence to interest rate and money growth targets. The chapter shows that some adherence to previously set money targets can emerge endogenously from the signal extraction problem faced by the central bank. The chapter also provides an analytical representation of the factors influencing the degree of optimal target adherence.

Actions of National Bank of Romania on Bank Liquidity

2017 ◽  
Vol 8 (2) ◽  
pp. 17-24 ◽  
Author(s):  
Violeta Elena Drăgoi ◽  
Larisa Elena Preda
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Strong Influence ◽  
Banking System ◽  
Reserve Requirements ◽  
Macroeconomic Variables ◽  
National Bank ◽  
The Interest Rate

Abstract The central bank’s action on bank liquidity implies the action on the amount of currency issued by the central bank that banks can acquire in their mutual relationships, and on its price, which is the action on the interest rate. In order to respond to banks’ treasury needs, the central bank acts on the money market through restrictions on refinancing options and handling reserve requirements. The paper aims to investigate the extent to which the NBR’s money tool system influences the mass and quality of credit granted by banks in the Romanian banking system. The monetary policy strategy adopted by the NBR had a strong influence on the macroeconomic variables of Romania

scholarly journals WAS THE INTEREST RATE POLICY OF THE ECB TOO LOOSE? INSIGHT FROM A SIMPLE TAYLOR RULE

2021 ◽  
Vol 9 (1) ◽  
pp. 19-28
Author(s):  
Behailu Shiferaw Benti ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Taylor Rule ◽  
Policy Framework ◽  
Economic Variables ◽  
Rule Based ◽  
Interest Rate Policy ◽  
The Difference ◽  
The Interest Rate

The interest setting of a central bank can be explained using a rule-based monetary policy. A rulebased monetary policy framework considers major economic variables to make a recommended interest rate. In an economy, the fluctuations in major economic variables are vital indicators that signal an action from the central bank. In this paper, we scrutinize the short-term interest rate setting of the European Central Bank (ECB) based on the observed economic conditions. We have based our analysis on a simple Taylor rule. The investigation includes evidence and implication from a selected time period to reflect on the interest rate setting practice followed. For comparison purposes, the applicability and validity of a rule-based monetary policy are then analyzed for the US relying on the interest rate setting of the Federal Reserve. Our empirical findings confirm that the interest rate adjustments in the two central banks go along with the recommendations from a simple Taylor rule. Finally, taking the difference between the interest rate settings of the two banks, an empirical analysis is made to identify whether this difference can be attributed to the difference in simple Taylor rule recommendations.

scholarly journals Credibility of the Philippine Central Bank: Evidenced by the Interest Rate Pass-Through

2017 ◽  
Vol 3 (1) ◽  
pp. 47-56
Author(s):  
Chu V. Nguyen
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Empirical Finding ◽  
Policy Makers ◽  
Long Run ◽  
Short Run ◽  
Pass Through ◽  
The Interest Rate

This study investigates the Philippine interest rate pass-through over the December 2001 through January 2016 period. The empirical findings suggest that the Philippine Central Bank has not been very effective in formulating and implementing its countercyclical monetary policy. Specifically, the empirical results reveal very low short-run and long- run interest rate pass-through. The Bounds test results indicate no long-term relationship between countercyclical monetary policy and market rates. Notwithstanding the banking system's remarkable performance in the recent years, amid lingering uncertainties in global financial markets, the Philippine Central Bank lacked the credibility in conducting its countercyclical monetary policy. This empirical finding may not be desirable but it forewarns the monetary policy makers of challenges in formulating and implementing their monetary policy.

Hauptrefinanzierungszins, Interbankenmarkt und Geldangebot im Euroraum

2011 ◽  
Vol 62 (2) ◽  
Author(s):  
Achim Hauck ◽  
Ulrike Neyer ◽  
Thomas Vieten
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Money Supply ◽  
Interbank Market ◽  
Policy Variable ◽  
Operating Target ◽  
The Interest Rate ◽  
Transmission Of Monetary Policy

SummaryIn macroeconomic models, the nominal money supply, the long-term nominal interest rate, or even the inflation rate usually serves as the monetary policy variable. In practice, however, none of these variables is directly controlled by the central bank. Consequently, these models do not accurately reflect the implementation of monetary policy. Based on a theoretical model which incorporates the main institutional features of the euro area, this paper analyzes the transmission of monetary policy impulses from their implementation (setting the interest rate at which banks can obtain liquidity from the central bank) via the interbank market to the aggregate money and credit supply in an economy. Building on this analysis, we discuss the ability of the central bank to steer its operating target, the interbank market interest rate, and the money supply.

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