Showing papers in "Contributions in Macroeconomics in 2002"
TL;DR: The authors showed that the lagged interest rate is not a fundamental component of the U.S. policy rule, and that its significance arises from the omission of serially correlated variables from the policy rule.
Abstract: Many researchers have found that the lagged interest rate enters estimated monetary policy rules with overwhelming significance. However, a recent paper by Rudebusch (2002) argues that the lagged interest rate is not a fundamental component of the U.S. policy rule, and that its significance arises from the omission of serially correlated variables from the policy rule. This paper demonstrates that, contrary to Rudebusch's claims, these two hypotheses can be directly distinguished in the estimation of the policy rule. Our findings indicate that while serially correlated omitted variables may be present, the lagged interest rate enters the policy rule on its own right and plays an important role in describing the behavior of the federal funds rate.
228 citations
TL;DR: In this article, the authors derived loss functions for analyses of optimal monetary policy that are grounded in the welfare of private agents, in the case of explicit optimizing models of private-sector behavior in which the real effects of monetary policy result from nominal price rigidity.
Abstract: This paper derives loss functions for analyses of optimal monetary policy that are grounded in the welfare of private agents, in the case of explicit optimizing models of private-sector behavior in which the real effects of monetary policy result from nominal price rigidity. A quadratic approximation to the utility-based welfare criterion is developed that allows comparison between this criterion and the ad hoc quadratic loss functions typically assumed in the literature on monetary policy evaluation. It is shown that the goal of inflation stabilization, generally presumed to be an important (and perhaps the preeminent) goal of monetary policy, can in fact be justified in such a framework, insofar as variable inflation results in real distortions when prices are not adjusted throughout the economy in a perfectly synchronized fashion. The exact sense in which inflation variability matters for welfare, however, depends upon the details of price-setting behavior.
139 citations
TL;DR: This paper analyzed public investment in social infrastructure using a two-period model in which a government must intermediate all infrastructure investment and found that these intermediation costs cause threshold effects in the electoral process.
Abstract: We analyze public investment in social infrastructure using a two-period model in which a government must intermediate all infrastructure investment. Voters choose a government from two alternative types, high quality and low quality. A high quality government obtains higher returns on infrastructure but also demands a bigger consumption payoff for intermediating investment, implying higher taxes for the voting public. We find that these intermediation costs cause threshold effects in the electoral process -- closed economies above a critical level of first period income elect high quality governments while economies below that level elect low quality ones. Thresholds vanish when voters can borrow abroad; capital mobility reduces the current consumption cost of infrastructure investment and favors better quality governments.
27 citations
TL;DR: In this article, the authors discuss different ways that a government can control the size of the unit of value, that is, control the price level, by altering the resource content of a unit to stabilize its price.
Abstract: Governments determine the size of the unit of value just as they determine the length of the length and weight of physical units of measure. What are the different ways that a government can control the size of the unit of value, that is, control the price level? In general, the government designates a resource—gold, paper currency, another country’s currency—and defines its unit of value as a particular amount of that resource. An interesting variant—proposed by Irving Fisher in 1913 and implemented more recently in Chile—is to alter the resource content of the unit to stabilize the price level. Another idea is to alter the interest rate paid on reserves in a way that stabilizes the price level.
19 citations
TL;DR: In this article, the authors propose a model in which the nominal interest rate must rise more than inflation, which means that the coefficient on inflation in the interest rate rule must be greater than one.
Abstract: A popular model in the literature postulates an interest rate rule, a NAIRU price equation, and an aggregate demand equation in which aggregate demand depends on the real interest rate. In this model a positive inflation shock with the nominal interest rate held constant is explosive because it increases aggregate demand (because the real interest rate is lower), which increases inflation through the price equation, which further increases aggregate demand, and so on. In order for the model to be stable, the nominal interest rate must rise more than inflation, which means that the coefficient on inflation in the interest rate rule must be greater than one.
15 citations