Working Paper Series : Institute for Monetary and Financial Stability
9 search hits
- 68
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Fiscal consolidation strategy: an update for the budget reform proposal of march 2013
(2013)
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John F. Cogan
John B. Taylor
Volker Wieland
Maik Hendrik Wolters
- Recently, we evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013). Specifically, we published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. In this note, we provide an update of our research that evaluates this year’s budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, we show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. Our research makes use of a modern structural model of the economy that incorporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth.
- 67
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Monetary theory and monetary policy: reflections on the development over the last 150 years
(2012)
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Otmar Issing
Volker Wieland
- In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.
- 66
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Surprising comparative properties of monetary models: results from a new model database
(2012)
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John B. Taylor
Volker Wieland
- In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy using a new database of models designed for such investigations. We focus on three representative models due to Christiano, Eichenbaum, Evans (2005), Smets and Wouters (2007) and Taylor (1993a). Although these 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, optimized monetary policy rules differ across models and lack robustness. Model averaging offers an effective strategy for improving the robustness of policy rules.
- 62
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Forecasting and policy making
(2012)
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Volker Wieland
Maik Hendrik Wolters
- 61
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Fiscal consolidation strategy
(2012)
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John F. Cogan
John B. Taylor
Volker Wieland
Maik Hendrik Wolters
- In the aftermath of the global financial crisis and great recession, many countries face
substantial deficits and growing debts. In the United States, federal government outlays as a
ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent
after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget
to balance by gradually reducing this spending ratio over time to the level that prevailed prior
to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy.
We use structural macroeconomic models to estimate this impact focussing primarily on a
dynamic stochastic general equilibrium model with price and wage rigidities and adjustment
costs. We separate out the impact of reductions in government purchases and transfers, and
we allow for a reduction in both distortionary taxes and government debt relative to the
baseline of no consolidation. According to the model simulations GDP rises in the short run
upon announcement and implementation of this fiscal consolidation strategy and remains
higher than the baseline in the long run. We explore the role of the mix of expenditure cuts
and tax reductions as well as gradualism in achieving this policy outcome. Finally, we
conduct sensitivity studies regarding the type of model used and its parameterization.
- 57
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Complexity and monetary policy
(2012)
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Athanasios Orphanides
Volker Wieland
- 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.
- 52
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The new keynesian approach to dynamic general equilibrium modeling: models, methods, and macroeconomic policy evaluation
(2012)
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Sebastian Schmidt
Volker Wieland
- This chapter aims to provide a hands-on approach to New Keynesian models and their
uses for macroeconomic policy analysis. It starts by reviewing the origins of the New Keynesian
approach, the key model ingredients and representative models. Building blocks of
current-generation dynamic stochastic general equilibrium (DSGE) models are discussed in
detail. These models address the famous Lucas critique by deriving behavioral equations
systematically from the optimizing and forward-looking decision-making of households and
firms subject to well-defined constraints. State-of-the-art methods for solving and estimating
such models are reviewed and presented in examples. The chapter goes beyond the mere
presentation of the most popular benchmark model by providing a framework for model
comparison along with a database that includes a wide variety of macroeconomic models.
Thus, it offers a convenient approach for comparing new models to available benchmarks
and for investigating whether particular policy recommendations are robust to model uncertainty.
Such robustness analysis is illustrated by evaluating the performance of simple
monetary policy rules across a range of recently-estimated models including some with financial
market imperfections and by reviewing recent comparative findings regarding the
magnitude of government spending multipliers. The chapter concludes with a discussion of
important objectives for on-going and future research using the New Keynesian framework.
- 49
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A new comparative approach to macroeconomic modeling and policy analysis
(2012)
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Volker Wieland
Tobias Cwik
Gernot J. Müller
Sebastian Schmidt
Maik Hendrik Wolters
- In the aftermath of the global financial crisis, the state of macroeconomicmodeling 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.
- 46
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Asset pricing under rational learning about rare disasters
(2011)
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Christos Koulovatianos
Volker Wieland
- This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors’ information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the likelihood of rare disasters drop to a much more pessimistic level once a disaster has occurred. Such a shift in beliefs can trigger massive declines in price-dividend ratios. Pessimistic beliefs persist for some time. Thus, belief dynamics are a source of apparent excess volatility relative to a rational expectations benchmark. Due to the low frequency of disasters, even an infinitely-lived investor will remain uncertain about the exact probability. Our analysis is conducted in continuous time and offers closed-form solutions for asset prices. We distinguish between rational and adaptive Bayesian learning. Rational learners account for the possibility of future changes in beliefs in determining their demand for risky assets, while adaptive learners take beliefs as given. Thus, risky assets tend to be lower-valued and price-dividend ratios vary less under adaptive versus rational learning for identical priors. Keywords: beliefs, Bayesian learning, controlled diffusions and jump processes, learning about jumps, adaptive learning, rational learning. JEL classification: D83, G11, C11, D91, E21, D81, C61
