Posted Content•
Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe's Monetary Union
TL;DR: In this article, the authors reviewed models of business cycle stabilization with an eye to formulating lessons for policy in the euro area and described practical ways to implement an effective monetary-fiscal policy mix.
Abstract: The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
Citations
More filters
[...]
TL;DR: In this paper, the authors make a distinction between monetary and fiscal policies, and propose a model that recognizes the interaction between fiscal and monetary policies, based on models that recognize fiscal-monetary policy interactions.
Abstract: Drastic changes in central bank operations and monetary institutions in recent years have made previously standard approaches to explaining the determination of the price level obsolete. Recent expansions of central bank balance sheets and of the levels of rich-country sovereign debt, as well as the evolving political economy of the European Monetary Union, have made it clear that fiscal policy and monetary policy are intertwined. Our thinking and teaching about inflation, monetary policy and fiscal policy should be based on models that recognize fiscal-monetary policy interactions.
72 citations
01 Jan 2018
TL;DR: In this paper, the European Central Bank (ECB) celebrated its 20th anniversary and provided a comprehensive view of the ECB's monetary policy over these two decades, focusing on the challenges posed by the European twin financial and sovereign debt crises and the subsequent slow economic recovery.
Abstract: ABSTRACT:On June 1, 2018, the European Central Bank (ECB) celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB's monetary policy over these two decades. The first section gives a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases "conditioning" ECB monetary policy. We describe the monetary policy decisions from the ECB's perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key, critical issues that were the subject of debate. The second section contains various assessments. We analyze the achievement of the price stability mandate and developments in the ECB's credibility, and we also investigate the ECB's interest rate decisions through the lens of a simple empirical interest rate reaction function. Finally, we present the ECB's framework for thinking about nonstandard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how the ECB utilized its monetary policy to respond to the challenges posed by the European twin financial and sovereign debt crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary, and developing the strategic underpinnings of its policy framework.
67 citations
TL;DR: The authors explored the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved.
Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the "safe asset" status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longer-term prospects for the euro area.
41 citations
Book•
20 Feb 2018TL;DR: In this article, the authors make an analytical contribution to the ongoing discussion about the euro area's institutional setup, and suggest the need for long-run progress along three mutually supportive tracks.
Abstract: After significant progress as an immediate result of the euro crisis, the drive to complete Europe’s Economic and Monetary Union (EMU) has decelerated. While there is a broad consensus in Europe that EMU needs further development, the exact nature and timing of the reform agenda remains controversial. This paper makes an analytical contribution to the ongoing discussion about the euro area’s institutional setup. An in-depth look at the remaining gaps in the euro’s architecture, and the trade-offs that repairing them would present, suggests the need for long-run progress along three mutually supportive tracks. The first is more fiscal risk sharing, which will help enhance the credibility of the sovereign “no-bailout” rule. The second is complementary financial sector reforms to delink sovereigns and banks. And the third is more effective rules to discourage moral hazard. Helpfully, this evolution would ensure that financial markets provide more incentives for fiscal discipline than they do now. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, however, raising questions well beyond the domain of economics. These difficulties notwithstanding, without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.
33 citations
References
More filters
Posted Content•
TL;DR: This article developed a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint, and the model is a synthesis of the leading approaches in the literature.
Abstract: This paper develops a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint. The model is a synthesis of the leading approaches in the literature. In particular, the framework exhibits a financial accelerator,' in that endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy. In addition, we add several features to the model that are designed to enhance the empirical relevance. First, we incorporate money and price stickiness, which allows us to study how credit market frictions may influence the transmission of monetary policy. In addition, we allow for lags in investment which enables the model to generate both hump-shaped output dynamics and a lead-lag relation between asset prices and investment, as is consistent with the data. Finally, we allow for heterogeneity among firms to capture the fact that borrowers have differential access to capital markets. Under reasonable parametrizations of the model, the financial accelerator has a significant influence on business cycle dynamics.
5,370 citations
Book•
01 Jan 2003
TL;DR: Woodford as discussed by the authors proposes a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets, arguing that effective monetary policy requires that central banks construct a conscious and articulate account of what they are doing.
Abstract: With the collapse of the Bretton Woods system, any pretense of a connection of the world's currencies to any real commodity has been abandoned. Yet since the 1980s, most central banks have abandoned money-growth targets as practical guidelines for monetary policy as well. How then can pure "fiat" currencies be managed so as to create confidence in the stability of national units of account? Interest and Prices seeks to provide theoretical foundations for a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets. In such a world, effective monetary policy requires that central banks construct a conscious and articulate account of what they are doing. Michael Woodford reexamines the foundations of monetary economics, and shows how interest-rate policy can be used to achieve an inflation target in the absence of either commodity backing or control of a monetary aggregate. The book further shows how the tools of modern macroeconomic theory can be used to design an optimal inflation-targeting regime--one that balances stabilization goals with the pursuit of price stability in a way that is grounded in an explicit welfare analysis, and that takes account of the "New Classical" critique of traditional policy evaluation exercises. It thus argues that rule-based policymaking need not mean adherence to a rigid framework unrelated to stabilization objectives for the sake of credibility, while at the same time showing the advantages of rule-based over purely discretionary policymaking.
4,938 citations
"Macroeconomic Stabilization, Moneta..." refers background in this paper
...15 See Sims (1999), Benhabib et al. (2002), and Woodford (2003)....
[...]
...5 The classic treatment of forward guidance is in Eggertsson and Woodford (2003)....
[...]
...Furthermore, 2 The simple, standard model of conventional monetary policy can be found in, e.g., Woodford (2003) and Galí (2015)....
[...]
...3 The classic model of interest rate stabilization policy in the presence of the lower bound is in Eggertsson and Woodford (2003)....
[...]
...For fiscal policies that avoid indeterminacy by means of lowering the present value of primary surpluses see Benhabib et al. (2002) and Woodford (2003)....
[...]
TL;DR: Using a Bayesian likelihood approach, the authors estimate a dynamic stochastic general equilibrium model for the US economy using seven macroeconomic time series, incorporating many types of real and nominal frictions and seven types of structural shocks.
Abstract: Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"?
3,155 citations
TL;DR: In this paper, a public debt theory is constructed in which the Ricardian invariance theorem is valid as a first-order proposition but where the dependence excess burden on the timing of taxation implies an optimal time path of debt issue.
Abstract: A public debt theory is constructed in which the Ricardian invariance theorem is valid as a first-order proposition but where the dependence excess burden on the timing of taxation implies an optimal time path of debt issue. A central proposition is that deficits are varied in order to maintain expected constancy in tax rates. This behavior implies a positive effect on debt issue of temporary increases in government spending (as in wartime), a countercyclical response of debt to temporary income movements, and a one-to-one effect of expected inflation on nominal debt growth. Debt issue would be invariant with the outstanding debt-income ratio and, except for a mirror effect, with the level of government spending. Hypotheses are tested on U.S. data since World War I. Results are basically in accord with the theory. It also turns out that a small set of explanatory variables can account for the principal movements in interest-bearing federal debt since the 1920s.
3,112 citations
"Macroeconomic Stabilization, Moneta..." refers background in this paper
...See Barro (1979), Sims (2001), Schmitt-Grohé and Uribe (2004), and Adam (2011)....
[...]
..., 2015) and in the financial sector (starting with Bernanke et al., 1999). 3 The classic model of interest rate stabilization policy in the presence of the lower bound is in Eggertsson and Woodford (2003). Buiter and Panigirtzoglou (2003) and Agarwal and Kimball (2015) write about the possibility of eliminating the lower bound constraint....
[...]
TL;DR: The authors developed a quantitative monetary DSGE model with financial intermediaries that face endogenously determined balance sheet constraints and used the model to evaluate the effects of the central bank using unconventional monetary policy to combat a simulated financial crisis.
2,158 citations
"Macroeconomic Stabilization, Moneta..." refers background in this paper
...6 See, for instance, Eggertsson and Woodford (2003), Cúrdia and Woodford (2011), Del Negro et al. (2011), Gertler and Karadi (2011), Chen et al. (2012), Gertler and Karadi (2013), and Engen et al. (2015)....
[...]