Monetary Feedback Rule Research Articles

Alternative monetary policies and fiscal regime in new EU members

I investigate the relevance of a fiscal regime for disinflation in new EU member states (NMS). I generalize the framework of [Obstfeld, M., Rogoff, K., 1995. Exchange rate dynamics redux. Journal of Political Economy 103, 624–660] to incorporate the non-Ricardian fiscal regime and two monetary feedback rules: inflation targeting and depreciation targeting. Euro accession requires disinflation and stabilization of the exchange rate and thus restrictive monetary policy. The model illustrates that a sustainable and prudent fiscal policy is a necessary condition for successful stabilization of inflation. Thus, the lack of prudent fiscal policy, through its effects on inflation, may undermine the EMU accession of large NMS even when their fiscal outcomes fall within the Maastricht range.

International oil price changes: impact of oil prices on growth and inflation in the EU/OECD

This paper uses an open economy DSGE model to analyse the short and long run quantitative impact of a permanent oil price increase for output and inflation in the euro area and compares the results to the predictions of other models currently in use. Special emphasis is devoted to the issue of stagflation. It is found that with standard monetary feedback rules as currently estimated for the euro area, there is no severe inflation risk. The paper also addresses the issue to what extent there is a short run trade off between inflation and output with an adverse supply shock.

Stabilizing properties of monetary feedback rules: A representative-agent approach

Evidence from theoretical models fails to support the obvious preference that many stabilization-policy advocates have for monetary policies that feature negative feedback over those that feature positive feedback. In this paper, I employ a representative-agent model to investigate the stabilizing properties of positive- and negative-feedback monetary policy rules. I consider two alternative policy objectives—price-level stabilization and inflation-rate stabilization—along with two alternative versions of the agent's intertemporal allocation problem. None of the results supports the notion that negative-feedback policies are more likely than positive-feedback policies to be successful in stabilizing the price level or the inflation rate.

How to avoid the consequences of anticipated monetary policies

This paper analyzes how monetary policy in an overlapping generations model can be designed to avoid inflationary consequences of anticipated changes of monetary policies. Avoiding these inflationary consequences will require a once and for all increase (decrease) in monetary growth immediately before the policy switch takes place if the relative risk aversion is greater (less) than unity. If the relative risk aversion is greater than unity, the avoidance of inflationary consequences is also time-consistent. Moreover, a general monetary feedback rule ensures that the economy picks the steady state with the lowest inflation rate. Our results suggest that the difference between unanticipated and anticipated policy switches may not be as important as generally assumed, because the consequences of the latter can be neutralized.

Sticky Prices and Alternative Monetary Feedback Rules: How Robust is the Overshooting Phenomenon?

The present paper incorporates a mechanism of rules-based central-bank interventions into a Dornbusch-type framework. We show that the implied reactions of exchange rates and interest and interest rate differentials in response to a monetary shock depend crucially on the particular monetary policy feedback rule. The Dornbusch case of postively correlated and overshooting nominal and real exchange rates as well as nominal and real interest rate differentials is only one of the possible scenarios of our model. Different scenarios imply zero and negative correlations and even multiple overshooting. [E58, F31, F41]

The Theory of Exchange Rate Target Zones

The theory of exchange rate target zones focuses on the role of exchange rate expectations in determining exchange rate behaviour and interest rate differentials in currency bands. This paper analyses earlier models of the target zone research programme as well as more recent developments including endogenous realignment expectations, price rigidities and alternative monetary feedback rules by means of a unified approach. Target zones may be the cause of stabilizing or destabilizing exchange rate expectations, the determinants of which crucially depend on the within‐band central bank policy as well as the credibility of the central banks’ commitment to defend the target zone. The paper closes with a discussion of the relative merits of implementing a target zone and some suggestions for further research.

Combination Monetary Feedback Rule Affects Output

The effectiveness of combination monetary feedback rule and fiscal policy under rational expectations is examined. The fiscal policy takes into account not only a progressive tax structure but also government expenditure. The model consists of IS and LM relationships and a Lucas supply function. The model is solved analytically. Both the progressive tax structure and the combination monetary feedback provide an automatic but not immediate adjustment to reduce the expectation error. Therefore the behaviour of real output is influenced not only by the disturbance terms but also by the policy parameters of the progressive tax structure and the combination monetary feedback rule.

Differential Information and the Role for an Active Stabilization Policy

The paper considers the possibility of pursuing a systematic monetary policy to overcome the coordination problems arising when agents have differential information. It is shown that a monetary feedback rule involving current feedback but no prospective feedback can eliminate the information problem making the implications of the differential information immaterial for real allocations. The paper also considers a private indexation scheme as a substitute for monetary policy, and it is shown that these differ since indexation on currently known variables is neutral. Indexation of a prospective nature is, however, equivalent to a prospective feedback to the money supply.

Real effects of anticipated and unanticipated money: Some problems of estimation and hypothesis testing

The paper addresses two issues that arise in estimation and testing of the real effects of anticipated and unanticipated money. First it is shown that identification of the effects of unanticipated (or unperceived) monetary growth on real output is possible only if the a priori restriction is imposed that monetary growth does not depend on unanticipated (or unperceived) output. Second, the existing empirical work of Barro and others does not allow for three known channels through which money can affect real variables. These are (1) past and present anticipations of future monetary growth (the inflation tax channel), (2) expectations of monetary growth in a given period conditioned at various preceding dates (the Fischer-Phelps-Taylor effect) and (3) past and present revisions in forecasts of future monetary growth. The presence of the first of these would mean that alternative open-loop monetary growth rules have real effects. The presence of the other two implies that monetary feedback rules can have real effects. Omission of the first channel can lead to biased estimates of the effects of past anticipated monetary growth. Potentially serious observational equivalence problems are associated with the other two.

Long-term contracts, imperfect information, and monetary policy

This paper considers the implications of imperfect information for monetary policy in a model with rational expectations and long-term contracts. The source of uncertainty is the inability of the monetary authority and private agents to directly observe systematic aggregate real and nominal disturbances. Imperfect information introduces the possibility of persistence in the departure of output from the natural level which lasts well beyond the wage setting interval, because the filtering process that agents use to estimate the disturbances leads to serially correlated errors in the wage setting process. It also implies that a monetary feedback rule can affect output only if it is tied to unexpected movements in the information variables. The policy issue posed is related to Friedman's original defense of the constant money growth rule, which emphasized uncertainty about the system rather than the neutrality of systematic monetary rules.

Non-uniqueness and the role of the monetary authorities

Our purpose in this note is to suggest that in macroeconomic rational expectation models exhibiting non-uniqueness the monetary authorities by suitable choice of an alternative monetary feedback rule can in general ensure uniqueness. We comment on the implications of this.

Optimal monetary policy under flexible exchange rates

This paper considers optimal monetary stabilization policy under flexible exchange rates in a model where exchange rate expectations are generated regressively. The analysis highlights the intimate relationship that exists between: (a) the direction of the optimal monetary feedback rule, (b) the amount of initial overshooting of the exchange rate following an exogenous monetary expansion, (c) the subsequent speed of adjustment to the new equilibrium. The optimal policy may either involve leaning against the wind, thereby reducing the size of the initial jump and the speed of the subsequent adjustment, relative to a passive policy. Alternatively it may involve leaning with the wind, in which case both the size of the initial jump and the speed of subsequent adjustment are increased.