Staggered prices in a utility-maximizing framework
TL;DR: In this article, the authors developed a model of staggered prices along the lines of Phelps (1978) and Taylor (1979, 1980), but utilizing an analytically more tractable price-setting technology.
About: This article is published in Journal of Monetary Economics.The article was published on 1983-09-01. It has received 8580 citations till now. The article focuses on the topics: Nominal rigidity & Taylor rule.
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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
TL;DR: In this article, a review of the recent literature on monetary policy rules is presented, and the authors exposit the monetary policy design problem within a simple baseline theoretical framework and consider the implications of adding various real word complications.
Abstract: This paper reviews the recent literature on monetary policy rules. To organize the discussion, we exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real word complications. We concentrate on developing results that are robust across a reasonable variety of competing macroeconomic frameworks. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation and consider the implications of frictions such as imperfect information and model uncertainty. Finally, we assess how proposed simple rules, such as the Taylor rule, square with the principles for optimal policy that we describe. We use this same metric to evaluate the recent course of U.S. monetary policy.
4,540 citations
TL;DR: In this article, the authors present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output, and the key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy.
Abstract: We present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts that have an average duration of three quarters and variable capital utilization.
4,250 citations
TL;DR: In contrast to conventional wisdom, this paper showed that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level, and also considered the implications of frictions such as imperfect information.
Abstract: The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.
3,990 citations
TL;DR: In this article, the authors estimate a forward-looking monetary policy reaction function for the postwar United States economy, before and after Volcker's appointment as Fed Chairman in 1979, and compare some of the implications of the estimated rules for the equilibrium properties of ineation and output, using a simple macroeconomic model.
Abstract: We estimate a forward-looking monetary policy reaction function for the postwar United States economy, before and after Volcker’s appointment as Fed Chairman in 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected ineation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of ineation and output, using a simple macroeconomic model, and show that the Volcker-Greenspan rule is stabilizing.
3,914 citations
References
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Book•
01 Jun 1984
TL;DR: In this article, the Routh-Hurwitz problem of singular pencils of matrices has been studied in the context of systems of linear differential equations with variable coefficients, and its applications to the analysis of complex matrices have been discussed.
Abstract: Volume 2: XI. Complex symmetric, skew-symmetric, and orthogonal matrices: 1. Some formulas for complex orthogonal and unitary matrices 2. Polar decomposition of a complex matrix 3. The normal form of a complex symmetric matrix 4. The normal form of a complex skew-symmetric matrix 5. The normal form of a complex orthogonal matrix XII. Singular pencils of matrices: 1. Introduction 2. Regular pencils of matrices 3. Singular pencils. The reduction theorem 4. The canonical form of a singular pencil of matrices 5. The minimal indices of a pencil. Criterion for strong equivalence of pencils 6. Singular pencils of quadratic forms 7. Application to differential equations XIII. Matrices with non-negative elements: 1. General properties 2. Spectral properties of irreducible non-negative matrices 3. Reducible matrices 4. The normal form of a reducible matrix 5. Primitive and imprimitive matrices 6. Stochastic matrices 7. Limiting probabilities for a homogeneous Markov chain with a finite number of states 8. Totally non-negative matrices 9. Oscillatory matrices XIV. Applications of the theory of matrices to the investigation of systems of linear differential equations: 1. Systems of linear differential equations with variable coefficients. General concepts 2. Lyapunov transformations 3. Reducible systems 4. The canonical form of a reducible system. Erugin's theorem 5. The matricant 6. The multiplicative integral. The infinitesimal calculus of Volterra 7. Differential systems in a complex domain. General properties 8. The multiplicative integral in a complex domain 9. Isolated singular points 10. Regular singularities 11. Reducible analytic systems 12. Analytic functions of several matrices and their application to the investigation of differential systems. The papers of Lappo-Danilevskii XV. The problem of Routh-Hurwitz and related questions: 1. Introduction 2. Cauchy indices 3. Routh's algorithm 4. The singular case. Examples 5. Lyapunov's theorem 6. The theorem of Routh-Hurwitz 7. Orlando's formula 8. Singular cases in the Routh-Hurwitz theorem 9. The method of quadratic forms. Determination of the number of distinct real roots of a polynomial 10. Infinite Hankel matrices of finite rank 11. Determination of the index of an arbitrary rational fraction by the coefficients of numerator and denominator 12. Another proof of the Routh-Hurwitz theorem 13. Some supplements to the Routh-Hurwitz theorem. Stability criterion of Lienard and Chipart 14. Some properties of Hurwitz polynomials. Stieltjes' theorem. Representation of Hurwitz polynomials by continued fractions 15. Domain of stability. Markov parameters 16. Connection with the problem of moments 17. Theorems of Markov and Chebyshev 18. The generalized Routh-Hurwitz problem Bibliography Index.
9,334 citations
TL;DR: In this article, the authors show that staggered wage contracts as short as 1 year are capable of generating the type of unemployment persistence which has been observed during postwar business cycles in the United States.
Abstract: Staggered wage contracts as short as 1 year are shown to be capable of generating the type of unemployment persistence which has been observed during postwar business cycles in the United States. A...
2,525 citations
TL;DR: In this paper, alternative monetary policies are analyzed in an ad hoc macroeconomic model in which the public's expectations about prices are rational, and it turns out that the probility distribution of output is independent of the particular deterministic money supply rule in effect.
Abstract: Alternative monetary policies are analyzed in an ad hoc macroeconomic model in which the public's expectations about prices are rational. The ad hoc model is one in which there is long-run neutrality, since it incorporates the aggregate supply schedule proposed by Lucas. Following Poole, the paper studies whether pegging the interest rate or pegging the money supply period by period minimizes an ad hoc quadratic loss function. It turns out that the probility distribution of output--dispersion as well as mean--is independent of the particular deterministic money supply rule in effect, and that under an interest rate rule the price level is indeterminate.
1,888 citations
Book•
01 Jul 1970TL;DR: In this paper, a theory of "controllability" is developed and injected into public economics and growth models to analyze optimal public expenditures in the context of modern growth theory, and a model of optimal growth with public capital is proposed.
Abstract: This book, co-authored by the Nobel-prized economist, Kenneth Arrow, considers public expenditures in the context of modern growth theory. It analyzes optimal growth with public capital. A theory of 'controllability' is developed and injected into public economics and growth models.
Originally published in 1970
1,006 citations
Posted Content•
910 citations