scholarly journals Learning as a Rational Foundation for Macroeconomics and Finance

2013 ◽  
Author(s):  
George W. Evans ◽  
Seppo Honkapohja
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Interest Rate ◽  
Lower Bound ◽  
Rational Expectations ◽  
Price Level ◽  
Decision Rules ◽  
Empirical Work ◽  
Learning Approach ◽  
Expectation Formation

This chapter examines the central ideas about learning and bounded rationality for macroeconomics and finance. It first introduces the main methodological issues concerning expectation formation and learning before discussing the circumstances in which rational expectations may arise. It then reviews empirical work that applies learning to macroeconomic issues and asset prices, along with the implications of the use of structural knowledge in learning and the form of the agents' decision rules. As an application, the scope of Ricardian Equivalence is considered. The chapter also presents three applications of the learning approach to monetary policy: the appropriate specification of interest rate rules; implementation of price-level targeting to achieve learning stability of the optimal rational expectations equilibrium; and whether under learning, commitment to price-level targeting can be sufficient to rule out the deflation trap of a zero interest rate lower bound and return the economy to the intended rational expectations steady state.

Controlling Money Supply And Price Level With Unknown Regime Shifts: The Case Of Chile

2011 ◽  
Vol 24 (2) ◽  
Author(s):  
Abdulnasser Hatemi-J ◽  
Manuchehr Irandoust
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Money Supply ◽  
Price Level ◽  
Regime Shifts ◽  
Font Size ◽  
Long Run ◽  
Causality Tests ◽  
The Relationship ◽  
Second Period

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;" lang="EN-GB"><span style="font-family: Times New Roman;">This paper investigates the relationship between money supply and price level using new tests for cointegration with two unknown regime shifts and bootstrap causality tests. Quarterly Chilean data from 1973: I to 2006: III is used. We find empirical evidence that the variables establish a long-run steady state relationship in the presence of two regime shifts. The elasticity of price level with regard to money supply is close to unity during the first period (prior to 1978: II). The elasticity is reduced during the second period (1978: III-1986: I) and it is also reduced for the remaining period but the reduction is smaller. We also conducted bootstrap causality tests that reveal the following: in the first sub-period there is bidirectional causality between the underlying variables. In the last two sub-periods money supply causes the price level only. This implies that money supply is weakly exogenous concerning the price level and that the monetary authority had enough independence to execute an active monetary policy in Chile. <span style="mso-bidi-font-weight: bold;"></span></span></span></p>

The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan

2004 ◽  
Vol 187 ◽  
pp. 76-92 ◽  
Author(s):  
Benjamin Hunt ◽  
Douglas Laxton
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Price Level ◽  
Macroeconomic Model ◽  
Policy Strategies

This paper uses the IMF's macroeconomic model MULTIMOD to examine the implications of the zero interest rate floor (ZIF) for the design of monetary policy in Japan. Similar to findings in other studies, targeting rates of inflation lower than 2.0 per cent significantly increases the likelihood of the ZIF becoming binding. Systematic monetary policy strategies that respond strongly to stabilise output and inflation, or that incorporate some explicit price-level component, can help to mitigate the implications of the ZIF.

scholarly journals LEARNING IN COBWEB EXPERIMENTS

2007 ◽  
Vol 11 (S1) ◽  
pp. 8-33 ◽  
Author(s):  
CARS HOMMES ◽  
JOEP SONNEMANS ◽  
JAN TUINSTRA ◽  
HENK VAN DE VELDEN
Keyword(s):  
Steady State ◽  
Rational Expectations ◽  
Dynamic Models ◽  
Good Description ◽  
Market Model ◽  
Equilibrium Equations ◽  
Market Prices ◽  
Sample Mean ◽  
Expectation Formation ◽  
Price Fluctuations

Different theories of expectation formation and learning usually yield different outcomes for realized market prices in dynamic models. The purpose of this paper is to investigate expectation formation and learning in a controlled experimental environment. Subjects are asked to predict the next period's aggregate price in a dynamic commodity market model with feedback from individual expectations. Subjects have no information about underlying market equilibrium equations, but can learn by observing past price realizations and predictions. We conduct a stable, an unstable, and a strongly unstable treatment. In the stable treatment, rational expectations (RE) yield a good description of observed aggregate price fluctuations: prices remain close to the RE steady state. In the unstable treatments, prices exhibit large fluctuations around the RE steady state. Although the sample mean of realized prices is close to the RE steady state, the amplitude of the price fluctuations as measured by the variance is significantly larger than the amplitude under RE, implying persistent excess volatility. However, agents' forecasts are boundedly rational in the sense that fluctuations in aggregate prices are unpredictable and exhibit no forecastable structure that could easily be exploited.

scholarly journals Monetary policy special features in the context of low interest rates

2020 ◽  
Vol 2 ◽  
pp. 50-64
Author(s):  
Kristina Nesterova ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Price Level ◽  
Nominal Interest Rate ◽  
Inflation Target ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Monetary Rules

Introduction. The paper considers a wide range of monetary policy rules: integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. The author also considers discretionary policy used by central banks when the nominal rate is close to zero, such as dramatic preventive cut of the key interest rate and interventions in the open markets with the aim of cutting long-term interest rates. The relevance of this problem is supported by global long-term macroeconomic and demographic factors, such as the dynamics of oil prices and the aging of the population. The aim of the paper is to identify the most effective monetary policy rules in order to reduce the risk of a nominal interest rate falling to zero. Methods. Analysis of the background and the results of general equilibrium models modeling monetary policy is carried out. Analysis of the role of current global trends (based on statistics) in aggravating the problem of declining interest rates. Scientific novelty of the research. The author systematizes the conclusions of modern macroeconomic theory, which offers a number of monetary rules making it possible to reduce the likelihood of falling into the zero bound of interest rate. Results. The effectiveness of monetary rules such as targeting nominal GDP and price levels in preventing the nominal interest rate from falling to zero is shown, primarily due to more efficient public expectations management which is a weak point of discretionary intervention. Conclusions. Under the current global factors for many developed countries and some oil-exporters, the downward trend in nominal rates persists. Combined with slowdown in economic growth, such threat may have negative consequences for the Russian economy. In this case, it seems reasonable to stick to the inflation target above 2% per year and in the future to consider switching to targeting the price level or nominal GDP.

scholarly journals Monetary policy transparency and financial market forecasts in South Africa

2008 ◽  
Vol 2 (1) ◽  
pp. 31-56 ◽  
Author(s):  
Vivek Arora
Keyword(s):  
South Africa ◽  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Empirical Work ◽  
Economic Benefits ◽  
Cross Sectional ◽  
Inflation Forecasts ◽  
Reserve Bank ◽  
Monetary Policy Transparency

The transparency of monetary policy in South Africa has increased substantially since the end of the 1990s. But little empirical work has been done to examine the economic benefits of the increased transparency. This paper shows that, in recent years, South African private sector forecasters have become better able to forecast interest rates, are less surprised by reserve bank policy announcements, and are less diverse in the cross-sectional variety of their interest rate forecasts. In addition, there is some evidence that the accuracy of inflation forecasts has increased. The improvements in interest rate and inflation forecasts have exceeded those in real output forecasts, suggesting that increases in monetary policy transparency are likely to have played a role.

Inflation expectations: An overview of modern approaches

2019 ◽  
pp. 54-80 ◽  
Author(s):  
N. A. Ranneva
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Markets ◽  
Rational Expectations ◽  
Phillips Curve ◽  
Time Estimation ◽  
Central Banks ◽  
Inflation Expectations ◽  
Expectation Formation ◽  
Theoretical Approaches

Modern economic theory considers expectations as a key determinant of actual inflation. How agents form those expectations therefore plays a central role in macroeconomic dynamics and policy-making. The understanding of the expectation formation process and the real-time estimation of expectations are especially important for central banks because they need to be sure that longer-term inflation expectations are anchored at the target of inflation, set by the central bank. When expectations are anchored — it is a clear sign that the monetary policy is effective and that markets trust the central bank. However, it is not easy to assess the expected inflation: it is not observable and cannot be directly measured. Central banks can only use the indirect estimates of this variable. For many years the main theoretical framework for modeling and analysis of inflation expectations was Phillips curve with rational expectations which substituted the adaptive expectations. Today many alternative models of expectation formation are available. The article provides a brief overview of the evolution of theoretical approaches to inflation expectation formation and their impact on the monetary policy. Besides, using the experience of the U.S., the article addresses two main ways to gauge inflation expectations empirically — survey-based measures (for different groups of respondents) and measures based on the data from American financial markets. Shortcomings and merits of both approaches are discussed, as well as the importance of highly developed financial markets, which can become the source of more precise information on inflation expectations.

scholarly journals Forecast accuracy of a BVAR under alternative specifications of the zero lower bound

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Tim Oliver Berg
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Forecast Accuracy ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Policy Shocks ◽  
Density Forecasts ◽  
Effect Of Monetary Policy

AbstractThis paper discusses how the forecast accuracy of a Bayesian vector autoregression (BVAR) is affected by introducing the zero lower bound on the federal funds rate. As a benchmark I adopt a common BVAR specification, including 18 variables, estimated shrinkage, and no nonlinearity. Then I entertain alternative specifications of the zero lower bound. I account for the possibility that the effect of monetary policy on the economy is different in this regime, replace the federal funds rate by its shadow rate, consider a logarithmic transformation, feed in monetary policy shocks, or utilize conditional forecasts allowing for all shocks implemented through a rejection sampler. The latter two are also coupled with interest rate expectations from future contracts. It is shown that the predictive densities of all these specifications are greatly different, suggesting that this modeling choice is not innocuous. The comparison is based on the accuracy of point and density forecasts of major US macroeconomic series during the period 2009:1 to 2014:4. The introduction of the zero lower bound is not beneficial per se, but it depends on how it is done and which series is forecasted. With caution, I recommend the shadow rate specification and the rejection sampler combined with interest rate expectations to deal with the nonlinearity in the policy rate. Since the policy rate will remain low for some time, these findings could prove useful for practical forecasters.

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