Choice Of Monetary Policy Regime Research Articles

Monetary policy and noise traders: A welfare analysis

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes in this milieu. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

Monetary Policy and Tobin Taxes: A Welfare Analysis

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital flows. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

What Really Drives Public Debt: A Holistic Approach

This paper presents a novel approach to detail the propagation of shocks to public debt. The modeling technique involves a structural vector auto-regression (SVAR) estimator with an endogenous debt accumulation equation. It explores how the main drivers of sovereign debt dynamics—the primary balance, the interest rate, growth and inflation—interact with each other. Such analysis is particularly useful for debt sustainability analysis. We find that some interactions exacerbate the impact of shocks to the accumulation of debt, while others act to stabilize debt dynamics. Furthermore, the choice of monetary policy regime plays an important role in these debt dynamics – countries with constrained monetary policy are more at risk from changes in market sentiment and must rely much more on fiscal policy to constrain debt.

What Really Drives Public Debt: A Holistic Approach

This paper presents a novel approach to detail the propagation of shocks to public debt. The modeling technique involves a structural vector auto-regression (SVAR) estimator with an endogenous debt accumulation equation. It explores how the main drivers of sovereign debt dynamics—the primary balance, the interest rate, growth and inflation—interact with each other. Such analysis is particularly useful for debt sustainability analysis. We find that some interactions exacerbate the impact of shocks to the accumulation of debt, while others act to stabilize debt dynamics. Furthermore, the choice of monetary policy regime plays an important role in these debt dynamics – countries with constrained monetary policy are more at risk from changes in market sentiment and must rely much more on fiscal policy to constrain debt.

The effects of the monetary policy regime shift to inflation targeting on the real interest rate in the United Kingdom

This paper studies the effects of the monetary policy regime shift to inflation targeting on the stochastic properties of the real interest rate in the U.K. The empirical analysis suggests a constant mean of the real interest rate that shifts with the monetary policy regime change to inflation targeting in October 1992. The mean-reverting level of the real interest rate has decreased from 5.1% to 2.3% per annum with the change in monetary policy to inflation targeting. In addition, the shift in monetary policy regime to inflation targeting has reduced the volatility of the real interest rate and increased the persistence of real interest rate deviations from the mean. The results suggest that the central bank can affect the stochastic properties of the real interest rate through the choice of monetary policy regime over a long period of time.

Dlouhodobá reálná apreciace jako fenomén ekonomické konvergence

The paper discusses the phenomenon of long-term real equilibrium appreciation of the koruna in the context of economic, i.e. nominal and real convergence. The real appreciation can take place either through a nominal exchange rate channel or through inflation differential channel vis-ĂĄ-vis the reference country, or through a combination of those two channels. However, the choice of monetary policy regime predetermines the occurrence and intensity of those channels. Subsequently, the paper summarizes the sources of equilibrium real appreciation, i.e. Balassa-Samuelson effect, the effect of terms of trade, FDI inflows, the impact of changes in the structure of domestic consumption and the effect of state administrative prices. It also presents range of models which are applicable for estimation of equilibrium (real) exchange rate. Finally, the paper presents and discusses trajectory of equilibrium real appreciation resulting from models of the CNB (QPM, g3 and others).

The Choice of Monetary Policy Regime for Small Open Economies

Inflation targeting and exchange rate targeting, including monetary union, are analyzed in a simple, estimated macroeconomic model of a small open economy. Flexible inflation targeting produces lower nominal and real variability than exchange rate targeting, because the lat- ter gives rise to persistent oscillations in the real interest rate and the real exchange rate due to the ' Walters' effect'. We find, however, that with com- mitment to simple instrument rules, the performance of flexible inflation tar- geting can almost be matched

Uncertainty and Monetary Policy in a Wage Bargaining Model

In a wage bargaining model, increased uncertainty concerning monetary and real aggregates is shown to give rise to a higher equilibrium unemployment rate. Moreover, the equilibrium unemployment rate is found to depend on the choice of monetary policy regime, as this choice affects the uncertainty wage setters face when setting the nominal wage rate. It is also shown that the equilibrium inflation rate may depend on uncertainty in such a way that increased uncertainty gives rise to a higher equilibrium unemployment rate as well as a higher equilibrium inflation rate - or what has been called stagflation.

Optimal monetary policy, endogenous supply and rational expectations

In this paper we demonstrate that the choice of monetary policy regime will affect the variability of output when private agents, in forming their supply decisions, take into account the authority's selection of a policy rule. A striking feature of the analysis is that the choice between policy rules in Sargent-Wallace (1975) framework, but with endogenous aggregate supply, depends only on the variability of aggregate demand under each rule and not on the variability of aggregate supply. It follows that the choice of monetary policy rules reduces to the problem analyzed by Poole (1970) in the stochastic Keynesian structure.