New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level

2019 ◽  
Vol 52 (1) ◽  
pp. 69-87
Author(s):  
Peter Spahn
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Price Level ◽  
Central Banks ◽  
Jel Classification ◽  
Inflation Target ◽  
Long Run ◽  
Nominal Interest Rates

Abstract Whereas in former times, the ‘Chicago View’ in monetary policy stood for the Quantity Theory and money supply control, it is now the centre of unconventional approaches in macro theory. The Neo-Fisherian proposal suggests, in the case of low inflation and nominal interest rates pegged to the zero-lower bound, to increase policy rates immediately to the long-run equilibrium value that corresponds to the ‘natural’ real interest rate and the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt even if central banks abstain from monetising. Both views are criticized for analytical and empirical reasons. Zusammenfassung Während in früheren Zeiten die ‘Chicago-Sicht’ in der Geldpolitik für die Quantitätstheorie und das Konzept der Geldmengensteuerung stand, werden heute damit unkonventionelle Positionen in der makroökonomischen Theorie assoziiert. Der neue Fisher-Ansatz empfiehlt, im Fall niedriger Inflation und einer Beschränkung durch die Null-Zins-Grenze die Zentralbankzinsen direkt auf das Niveau anzuheben, dass durch den ‘natürlichen’ Realzins und die Zielinflationsrate bestimmt ist. Die Fiskalische Theorie der Preise behauptet, dass das Güterpreisniveau auf einen Wert springt, der die langfristige reale Tragfähigkeit der Staatsschulden sichert, selbst wenn die Notenbank keine Monetisierung betreibt. Beide Positionen können empirisch nicht überzeugen und werden einer analytischen Kritik unterzogen. JEL Classification: E52, E58

scholarly journals Monetary Policy, Financial Stability, and the Zero Lower Bound

2016 ◽  
Vol 106 (5) ◽  
pp. 39-42 ◽  
Author(s):  
Stanley Fischer
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Financial Stability ◽  
Central Banking ◽  
Zero Lower Bound ◽  
Short Term ◽  
Long Run ◽  
Nominal Interest Rates ◽  
Equilibrium Real Interest Rate

Much has happened in the world of central banking in the past decade. In this paper, I focus on three issues associated with the zero lower bound (ZLB) on short-term nominal interest rates and the nexus between monetary policy and financial stability: 1) whether we are moving toward a permanently lower long-run equilibrium real interest rate; 2) what steps can be taken to mitigate the constraints imposed by the ZLB; and 3) whether and how financial stability considerations should be incorporated in the conduct of monetary policy. These important topics deserve the attention of both academic and government professionals.

scholarly journals Robust Monetary Policy Under Uncertainty About the Lower Bound

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Peter Tillmann
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Central Bank ◽  
Interest Rates ◽  
Central Banks ◽  
Worst Case ◽  
Liquidity Trap ◽  
Nominal Interest Rates ◽  
True Location ◽  
Discretionary Monetary Policy

AbstractCentral banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary in the period before the liquidity trap.

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 Conducting Monetary Policy in South Asian Economies: An Investigation

2016 ◽  
Vol 55 (3) ◽  
pp. 161-190 ◽  
Author(s):  
Muhammad Arshad Khan ◽  
Ather Maqsood Ahmed
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Sri Lanka ◽  
Interest Rates ◽  
South Asian ◽  
Central Banks ◽  
Jel Classification ◽  
Monetary Authorities ◽  
Asian Economies ◽  
Exchange Rate Movements

Monetary policy which until recently aimed at targeting monetary aggregates has quietly given way to adjusting interest rates. Most of the Central Banks now focus on money reaction function that directly targets inflation or price level. This paper examines the way monetary policy is being conducted in the four major South Asian economies, namely, Bangladesh, India, Pakistan and Sri Lanka. The analysis is based on a variant of the Taylor rule framework. Using quarterly data over the period 1990Q1 to 2012Q4, the study finds that the monetary authorities in India, Pakistan and Sri Lanka have accommodated some degree of inflationary pressure, whereas Bangladesh has continuously smoothened interest rate while setting its monetary policy. Besides pursuing a mild monetary policy stance against inflation, India, Pakistan and Sri Lanka are also giving importance to foreign interest rate and real exchange rate movements to justify their relevance in monetary policy setting. However, the same has not been found to be true for Bangladesh. JEL Classification: E52, E58, E60 Keywords: Monetary Policy Rule, Central Banks, SAARC Countries

Price Level Stability: Some Issues

2000 ◽  
Vol 174 ◽  
pp. 68-79 ◽  
Author(s):  
Vitor Gaspar ◽  
Frank Smets
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Optimal Policy ◽  
Economic Activity ◽  
Price Level ◽  
Conventional Wisdom ◽  
Nominal Interest Rates ◽  
Limited Degree ◽  
Forward Looking

This article challenges the conventional wisdom that price level targeting necessarily increases the volatility of inflation and economic activity. It shows that the optimal policy under commitment for a society that cares only about the variability of output and inflation involves only a limited degree of base drift. The result crucially depends on the importance of forward-looking behaviour and on the credibility of the commitments. The case for price level targeting is strengthened when the possibility of a binding lower bound on nominal interest rates is considered. This may be increasingly relevant in a low inflation environment. This justifies renewed interest on price level targets in the context of thinking through how to prevent and respond to deflationary risks.

A NOTE ON NOMINAL GDP TARGETING AND THE ZERO LOWER BOUND

2016 ◽  
Vol 21 (8) ◽  
pp. 2138-2157 ◽  
Author(s):  
Roberto M. Billi
Keyword(s):  
Lower Bound ◽  
Central Bank ◽  
Interest Rates ◽  
Price Level ◽  
Supply And Demand ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Supply And Demand Shocks ◽  
Keynesian Model ◽  
Nominal Interest Rates

I compare nominal gross domestic product (GDP) level targeting with strict price level targeting in a small New Keynesian model, with the central bank operating under optimal discretion and facing a zero lower bound on nominal interest rates. I show that, if the economy is only buffeted by purely temporary shocks to inflation, nominal GDP level targeting may be preferable because it requires the burden of the shocks to be shared by prices and output. However, in the presence of persistent supply and demand shocks, strict price level targeting may be superior because it induces greater policy inertia and improves the tradeoffs faced by the central bank. During lower bound episodes, somewhat paradoxically, nominal GDP level targeting leads to larger falls in nominal GDP.

scholarly journals Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates

2021 ◽  
Vol 111 (1) ◽  
pp. 1-40
Author(s):  
Mauricio Ulate
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Great Recession ◽  
Commercial Banks ◽  
Central Banks ◽  
Bank Profitability ◽  
The Great Recession ◽  
Nominal Interest Rates ◽  
Level Data ◽  
Transmission Of Monetary Policy

After the Great Recession several central banks started setting negative nominal interest rates in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the rates that commercial banks charge on loans, but they can also erode bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. I use bank-level data to calibrate the model and find that monetary policy in negative territory is between 60 and 90 percent as effective as in positive territory. (JEL E12, E32, E43, E52, E58, G21)

Monetary Policy and Unnatural Low Interest Rates: Secular Stagnation or Financial Repression?

2019 ◽  
Vol 70 (2) ◽  
pp. 99-135 ◽  
Author(s):  
Ad van Riet
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Central Banks ◽  
Potential Growth ◽  
Secular Stagnation ◽  
Financial Repression ◽  
Low Interest Rates ◽  
Equilibrium Real Interest Rate

Abstract Market interest rates have been on a declining trend over the past 35 years in all advanced economies, even reaching negative territory in some European jurisdictions. This article reviews two competing explanations for the occurrence of unnatural low interest rates. The secular stagnation hypothesis of Keynesian origin maintains that persistent non-monetary factors have caused a structural excess of desired savings over planned investments which steadily pushed down the equilibrium real interest rate that is consistent with a balanced economy. Major central banks in turn failed to sufficiently lower their monetary policy rates to revive aggregate demand, leading to anaemic economic recoveries and hysteresis effects. By contrast, the financial repression doctrine argues that central banks pursued low interest rates to ease the government budget constraint and serve political objectives. The Austrian School of Economics states that this monetary easing bias sowed the seeds of repeated boom/bust cycles and created economic distortions that dragged down potential growth and the equilibrium real interest rate. The core of the debate appears to be the long-standing controversy about the desirable role for the state in guiding the economy on a higher potential growth path as opposed to relying on the efficiency of market processes in generating prosperity.

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