Year of publication
- Working Paper (29) (remove)
- Center for Financial Studies (CFS) (29) (remove)
- Money in monetary policy design : monetary cross-checking in the New-Keynesian model (2009)
- In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfied. The model has been criticized for failing to explain common trends in money growth and inflation, and that therefore money should be used as a cross-check in policy formulation (see Lucas (2007)). We show that the New-Keynesian model can explain such trends if one allows for the possibility of persistent central bank misperceptions. Such misperceptions motivate the search for policies that include additional robustness checks. In earlier work, we proposed an interest rate rule that is near-optimal in normal times but includes a cross-check with monetary information. In case of unusual monetary trends, interest rates are adjusted. In this paper, we show in detail how to derive the appropriate magnitude of the interest rate adjustment following a significant cross-check with monetary information, when the New-Keynesian model is the central bank’s preferred model. The cross-check is shown to be effective in offsetting persistent deviations of inflation due to central bank misperceptions. JEL-Classifications: E32, E41, E43, E52, E58 Keywords: Monetary Policy, New-Keynesian Model, Money, Quantity Theory, European Central Bank, Policy Under Uncertainty
- Surprising comparative properties of monetary models : results from a new data base (2009)
- In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models. JEL-Classifications: C52, E30, E52 Keywords: Monetary Models, Macroeconomic Modelling, Monetary Policy Rules, Robustness, Model Comparison, DSGE Models.
- Keynesian government spending multipliers and spillovers in the euro area (2009)
- The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending — the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation. JEL-Classifications: E62, E63, H31 Keywords: Fiscal Policy, Fiscal Stimulus, Government Spending Multipliers, Model Uncertainty, Crowding-out, New-Keynesian Models.
- Fiscal stimulus and the promise of future spending cuts : a comment (2009)
- Recent evaluations of the fiscal stimulus packages recently enacted in the United States and Europe such as Cogan, Cwik, Taylor and Wieland (2009) and Cwik and Wieland (2009) suggest that the GDP effects will be modest due to crowding-out of private consumption and investment. Corsetti, Meier and Mueller (2009a,b) argue that spending shocks are typically followed by consolidations with substantive spending cuts, which enhance the short-run stimulus effect. This note investigates the implications of this argument for the estimated impact of recent stimulus packages and the case for discretionary fiscal policy. JEL-Classifications: C32, G14, G17 Keywords: Fiscal Multiplier, Fiscal Stimulus, Discretionary Fiscal Policy, New Keynesian Model, Crowding-out, Government Spending, Macroeconomic Modelling.
- Quantitative easing : a rationale and some evidence from Japan (2009)
- This paper reviews the rationale for quantitative easing when central bank policy rates reach near zero levels in light of recent announcements regarding direct asset purchases by the Bank of England, the Bank of Japan, the U.S. Federal Reserve and the European Central Bank. Empirical evidence from the previous period of quantitative easing in Japan between 2001 and 2006 is presented. During this earlier period the Bank of Japan was able to expand the monetary base very quickly and significantly. Quantitative easing translated into a greater and more lasting expansion of M1 relative to nominal GDP. Deflation subsided by 2005. As soon as inflation appeared to stabilize near a rate of zero, the Bank of Japan rapidly reduced the monetary base as a share of nominal income as it had announced in 2001. The Bank was able to exit from extensive quantitative easing within less than a year. Some implications for the current situation in Europe and the United States are discussed. JEL-Classifications: E31, E52, E58, E61 Keywords: Deflation, Quantitative Easing, Japan, Monetary Policy, Zero Bound.
- The diversity of forecasts from macroeconomic models of the U.S. economy (2010)
- This paper investigates the accuracy and heterogeneity of output growth and inflation forecasts during the current and the four preceding NBER-dated U.S. recessions. We generate forecasts from six different models of the U.S. economy and compare them to professional forecasts from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters (SPF). The model parameters and model forecasts are derived from historical data vintages so as to ensure comparability to historical forecasts by professionals. The mean model forecast comes surprisingly close to the mean SPF and Greenbook forecasts in terms of accuracy even though the models only make use of a small number of data series. Model forecasts compare particularly well to professional forecasts at a horizon of three to four quarters and during recoveries. The extent of forecast heterogeneity is similar for model and professional forecasts but varies substantially over time. Thus, forecast heterogeneity constitutes a potentially important source of economic fluctuations. While the particular reasons for diversity in professional forecasts are not observable, the diversity in model forecasts can be traced to different modeling assumptions, information sets and parameter estimates. JEL Classification: C53, D84, E31, E32, E37 Keywords: Forecasting, Business Cycles, Heterogeneous Beliefs, Forecast Distribution, Model Uncertainty, Bayesian Estimation
- Complexity and monetary policy (2012)
- The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.
- A new comparative approach to macroeconomic modeling and policy analysis (2012)
- In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.
- Money in monetary policy design under uncertainty : the two-pillar Phillips curve versus ECB-style cross-checking (2007)
- The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical “two-pillar” Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favor of ECB-style cross-checking does not require direct effects of money on output or inflation. JEL Classification: E32, E41, E43, E52, E58
- Money in monetary policy design under uncertainty: a formal characterization of ECB-style cross-checking (2007)
- The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. JEL Classification: E32, E41, E43, E52, E58