The Side Effects of Safe Asset Creation

We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the ZLB to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

Are firms' expectations on the availability of external finance rational, adaptive or regressive?

PurposeThis study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.Design/methodology/approachIn this study, we link consecutive surveys from the Survey on the Access to Finance of Enterprises to bring new evidence on how non-financial corporations shape their expectations on external finance availability.FindingsIn line with the past literature, we demonstrate that the data reject the Rational Expectations hypothesis, and we find evidence in favor of the Adaptive Expectation mechanism.Originality/valueThis is the first study studying firms' expectations of external finance availability, implementing survey data of firms' expectations from the SAFE database on a country level. The formation of firm expectations is vital in directing policymakers in designing appropriate monetary policies, as both the employment and inflation targets of central banks around the world are highly dependent on the firm-level decision process.

Analysis of Inflation Targets in Indonesia During The New Normal Era: New Consensus Approach to an Open Economy

This article aims to discuss a growth model in terms of demand constrained by economic policy with inflation targeting in a super multiplier sraff model by analyzing how economic policy can affect productive capacity growth. This article also analyzes the open economy if inflation is a phenomenon resulting from the policy of the monetary authority that can manage the nominal exchange rate through changes in interest rates. Since the distribution of functional income will depend on the evolution of nominal wages, exchange rates and interest rates, we will show that the inflation targeting system, apart from being neutral in terms of long-term growth, can also produce different results in terms of the distribution of functional income

Investigation of optimal inflation targets for 15 major oil exporting Sub-Saharan African countries

Purpose The purpose of this paper is to investigate the optimal inflation targets for an appropriate exchange rate policy in 15 major oil exporting countries in Sub-Saharan African (SSA). Design/methodology/approach Dynamic heterogeneous panel threshold techniques are used via threshold-effect test and threshold regression. This procedure is achieved through a grid search and bootstrapping replications method to stimulate the asymptotic distribution of the likelihood ratio test of the null hypothesis on no-threshold as against the alternative hypothesis. The p-values validate the threshold estimates. Findings Findings revealed that the optimal inflation target has a turning point and its impact on the real exchange rate is up to a threshold level of 14.47 per cent. Furthermore, the inflation rate above the threshold level overwhelmingly revealed its effect on real exchange regimes. Research limitations/implications It would have been a good idea to investigate optimal inflation targets for all African countries but due to inadequate data the selection criteria was narrowed to oil-exporting countries in Sub-Saharan Africa. Practical implications Inflation targeting beyond the threshold level would have serious implications on the monetary policy. Originality/value To the best of the knowledge, this is the first study to look at optimal inflation targets for 15 major oil exporting countries in general and SSA countries in particular. The findings provide a critical analysis of an inflation regime for a typical oil-producing country that oil exports being their source of revenue.

Macroeconomic effects of inflation targeting in advanced and emerging market economies

The article assessed the treatment effects of targeting inflation regime on the real output and consumer inflation persistence in both advanced and emerging market economies. An empirical analysis is based on data from 35 OECD and 40 emerging countries and covers inflation and non-inflation targets over the period 1990–2017. The results showed that inflation targeting (henceforth – IT) had no significant impact on the GDP per capita growth rate but slightly reduced the output volatility. This study founded out that full-fledged IT had the effect of slowing down consumer inflation and reducing its volatility. Moreover, in the OECD countries, the monetary framework had certain advantages during the Great Recession. The authors argued that in order to maintain price stability in emerging economies, a high level of central bank independence and accountability is required.

In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment

Using a standard New Keynesian model, we show that moderate side effects of zero lower bound (ZLB) policy suffice for positive lower bound (PLB) policy to pay off in terms of welfare, especially when central banks fail to commit. For given side effects of the ZLB, as the shock that makes the ZLB bind becomes larger and more persistent, the dominance of PLB policy over ZLB policy becomes more likely. The findings hold for flexible and rigid economies with both fast and slow potential output growth and low and high inflation targets.