Working Paper Series : Institute for Monetary and Financial Stability
Dealing with a liquidity trap when government debt matters: optimal time-consistent monetary and fiscal policy
- How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
Capital inflows and asset prices: evidence from emerging Asia
- The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for - roughly - twice the portion of overall house price changes they explain in OECD countries. We also address crosscountry differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.
A new comparative approach to macroeconomic modeling and policy analysis
Gernot J. Müller
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.