New Keynesian General Equilibrium Model Research Articles

Monetary policy rules and wage bargaining structure in a New-Keynesian general equilibrium model with strategic interaction between unions and monetary authority

The objective of this article is to present a New Keynesian general equilibrium model in which the multiplicity of wage and price setters in a framework of strategic interaction between the private sector and monetary authority is a sufficient condition for non-neutrality of the monetary policy rule. In this theoretical framework we can show that (i) strategic interaction between monetary authority and labor unions produce the so-called “Calmfors-Driffil effect” in which different levels of centralization in wage bargains allowed to reach different results in terms of equilibrium unemployment rate; (ii) a higher level of conservatism in the conduction of monetary policy; i.e. higher weight for deviations of price inflation from the target in the monetary policy rule, for a given level of centralization of wage bargaining, produce better outcomes in terms of inflation and unemployment. These results shows that there is a trade-off between centralization of wage bargaining and a tighter monetary policy rule: the more centralized is the wage bargaining structure lower can be the weight of inflation in the monetary policy rule that allowed Central Bank could be to achieve some target level of inflation and unemployment. So, the model proposed here shows that income policies can be, in principle, such effective as monetary policy as a device for improve macroeconomic performance of capitalist economies.

Особенности денежно-кредитной политики в условиях низких ставок (Features of monetary policy at low rates)

Russian Abstract: В данной работе анализируется ряд монетарных правил, позволяющих снизить вероятность столкновения экономики с нулевой нижней границей процентной ставки. К ним относятся интегральная стабилизация, таргетирование номинального ВВП, уровня цен, номинальной ставки процента, повышенного уровня инфляции, введение отрицательной номинальной ставки процента и другие методы. Также рассматриваются дискреционные меры, используемые центральными банками в непосредственной близости номинальных процентных ставках к нулю, такие как резкое предупредительное сокращение ключевой ставки и интервенции на открытом рынке с целью сокращения долгосрочных процентных ставок. С помощью анализа современных экономико- математических моделей показывается эффективность таких монетарных правил как таргетирование номинального ВВП и уровня цен в предотвращении падения номинальной ставки процента до нуля, в первую очередь, благодаря эффективному управлению ожиданиями населения, что является слабой стороной дискреционного вмешательства. English Abstract: The paper analyses a number of monetary rules helping to decrease the probability of the nominal interest rate hitting the zero lower bound. Such measures include integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. Discretion such as sharp preventive drop in the interest rate and LSAP to “lower for longer” are also considered. According to up-to-date New-Keynesian general equilibrium models, the major advantage of rules such as NGDP and price level targeting is their capacity to prevent zero lower bound episodes mainly by managing expectations of the public efficiently, which is a drawback of discretionary policy.

Business Cycles in an Estimated DSGE Model of China

A small-scale New-Keynesian dynamic stochastic general equilibrium model is estimated by maximum likelihood method using quarterly data of China. Model specifications and parameter equalities between various competing model variants are addressed by formal statistical hypothesis tests, while implications for business cycle fluctuations are evaluated via a variance decomposition experiment, second-moments matching, and some out-of-sample forecast exercises. It is highlighted that both forward and backward components are important for the dynamics of output, inflation and real balances. The monetary authority will take a sufficient aggressive stance, with a significant lagged response, to the current inflation pressure, while leaving less attention to changes in aggregate output. Variance decomposition reveals that large percentages of variations in real and nominal variables are explained by the highly volatile preference shock and potential output shock, respectively. When nominal and real frictions as well as additional shocks are included, our estimated model overall can successfully reproduce the stylized facts of business cycles in the actual data of China and even frequently outperform those forecasts from an unconstrained VAR.

Monetary policy regimes and inflation in the new-Keynesian model

This paper shows that plausible modifications to the Taylor rule for monetary policy can help explain several empirical anomalies to the behavior of inflation in the new-Keynesian general equilibrium model. The key anomalies considered are (1) the persistence of inflation, both in reduced form and after conditioning on inflation’s driving processes, (2) the positive correlation between the output gap and the change in the inflation rate, and (3) the apparent bias in survey measures of expected inflation.The Taylor rule in this model includes the now standard assumption that the central bank smoothes changes to its target interest rate. It also includes Markov switching of a persistent inflation target between a low target rate and a high target rate. The model is calibrated to match Benati’s (2008) result that, historically, changes in monetary policy lead to a statistically significant change in the persistence of inflation.Matching Benati’s result requires a reduction in an exogenous, hence structural, source of persistence. However, inflation in the model inherits additional, non-structural, persistence from the process that governs the inflation target. As a result, the model is able to replicate measures of inflation persistence, even after conditioning on inflation’s driving processes. Agents with rational expectations and knowledge of the current inflation target will be aware of the possibility of a future target switch, causing their expectations to appear biased in small samples. Finally, with sticky nominal prices a discrete drop to the low-inflation target requires a loss of output while previously-set prices adjust.

Wage stickiness and unemployment fluctuations: an alternative approach

Erceg et al. (J Monet Econ 46:281–313, 2000) introduce sticky wages in a New-Keynesian general-equilibrium model. Alternatively, it is shown here how wage stickiness may bring unemployment fluctuations into a New-Keynesian model. Using a Bayesian econometric approach, both models are estimated with US quarterly data of the Great Moderation. Estimation results are similar in the two models and both provide a good empirical fit, with the crucial difference that our model delivers unemployment fluctuations. Thus, second-moment statistics of the US rate of unemployment are replicated reasonably well in our proposed New-Keynesian model with sticky wages. Demand-side shocks play a more important role than technology innovations or cost-push shock in explaining both output and unemployment fluctuations. In the welfare analysis, the cost of cyclical fluctuations during the Great Moderation is estimated at 0.60% of steady-state consumption.

A Política Monetária Brasileira sob o Regime de Metas de Inflação

O trabalho analisa a evolucao da politica monetaria desde a implementacao do regime de metas de inflacao no periodo de 1999 a 2009 com o intuito de avaliar se ha diferencas na conducao de politica monetaria entre as gestoes Arminio Fraga e Henrique Meirelles. Um modelo de equilibrio geral novo-keynesiano baseado em expectativas racionais e utilizado para modelar a economia brasileira e deriva-se uma regra de Taylor para encontrar a condicao suficiente para a convergencia da inflacao. O processo de analise empirica consiste em estimar um modelo de vetores auto-regressivos, cujos parâmetros variam ao longo do tempo assim como as inovacoes na matriz de variância-covariância. Para tanto, sera utilizado um algoritmo de simulacao de Monte Carlo. Os resultados empiricos mostram que (i) nao ha diferencas significativas na conducao de politica monetaria durante as gestoes Arminio Fraga e Henrique Meirelles; (ii) A partir de 2003, a taxa de juros permaneceu acima da necessaria para a convergencia da inflacao de acordo com a condicao de estabilidade; e (iii) a gestao Arminio Fraga agiu de acordo com a regra de estabilizacao na crise de 2002, porem a inflacao permaneceu acima da meta por causa da magnitude choques exogenos.

Monetary persistence and the labor market: A new perspective

Abstract In this paper we propose a novel way to model the labor market in the context of a New-Keynesian general equilibrium model, incorporating labor market frictions in the form of hiring and firing costs. We show that such a model is able to replicate many important stylized facts of the business cycle. The reactions to monetary and real shocks become much more sluggish. Job creation and job destruction are negatively correlated. And the volatility of unemployment is much larger than in the standard search and matching model.

Monetary Persistence and the Labor Market: A New Perspective

In this paper we propose a novel way to model the labor market in the context of a New-Keynesian general equilibrium model, incorporating labor market frictions in the form of hiring and firing costs. We show that such a model is able to replicate many important stylized facts of the business cycle. The reactions to monetary and real shocks become much more sluggish. Job creation and job destruction are negatively correlated. And the volatility of unemployment is much larger than in the standard search and matching model.

Inflation and Output Dynamics with Firm-owned Capital

We model firm-owned capital in a stochastic dynamic New-Keynesian general equilibrium model a la Calvo. We find that this structure implies equilibrium dynamics which are quantitatively different from the ones associated with a benchmark case where households accumulate capital and rent it to firms. Our findings therefore stress the importance of modeling an investment decision at the firm level - in addition to a meaningful price setting decision. Along the way we argue that the problem of modeling firm-owned capital with Calvo price-setting has not been solved in a correct way in the previous literature.