New Perspectives on Monetary Policy, Inflation, and the Business Cycle (original) (raw)

Monetary Policy and Nominal Rigidities Under Low Inflation

SSRN Electronic Journal

, as well as participants at presentations at Harvard University and Virginia Polytechnic and State University, for useful comments on earlier drafts, to Larry Katz and Greg Mankiw for helpful discussions, and to NBER for the hospitality when this paper was written.

Monetary Policy, Inflation, and the Business Cycle

Preface xi by Mike Woodford at MIT in the fall of 1988. His work in monetary economics (and in everything else) has always been a source of inspiration to me. Many other colleagues have helped me to improve the original manuscript, either with specific comments on earlier versions of the chapters, or through discussions over the years on some of the covered topics. A nonexhaustive list includes

Monetary Policy, Inflation, and the Business Cycle - Galí

Much of the material contained in the present book overlaps with that found in two other (excellent) books on monetary theory published in recent years: Carl Walsh's Monetary Theory and Policy (MIT Press, 3rd ed.) and Michael Woodford's Interest and Prices (Princeton University Press). The focus of the present book on the New Keynesian model, with the use of a single underlying framework throughout the chapters, represents the main difference from Walsh's, with the latter providing in many respects a more comprehensive, textbook-like, coverage of the field of monetary theory, with a variety of models being used. On the other hand, the main difference from Woodford's comprehensive treatise lies in the more compact presentation of the basic New Keynesian model and its implications for monetary policy found here, which may facilitate its use as a textbook in an introductory graduate course. In addition, the present book contains an analysis of unemployment and of open economy extensions of the basic New Keynesian model, which are topics not covered in Woodford's book. Many people have contributed to this book in important ways. First and foremost, I am in special debt with Rich Clarida, Mark Gertler, and Tommaso Monacelli, with whom I coauthored the original articles underlying much of the material found in this book, in particular that in chapters 5 and 8. I am also especially thankful to Olivier Blanchard who, as a teacher and thesis advisor at MIT, made me discover the fascination of modern macroeconomics. Working with him as a coauthor in recent years has helped me sharpen my understanding of many of the issues dealt with here. My interest in monetary theory was triggered by a course taught by Mike Woodford at MIT in the fall of 1988. His work in monetary economics (and in anything else) has always been a source of inspiration. Many other colleagues have helped me improve the present monograph either with specific comments on earlier versions of the chapters or through discussions over the years on some of the topics covered here.

Monetary policy and recent business-cycle experience

Some critics of recent monetary policy have focused on slow M2 growth, claiming that the Federal Reserve is too interested in price stability and is forsaking its growth mandate. Others criticize the Fed for achieving price stability too cautiously and urge the adoption of a rule that seeks to eliminate inflation more quickly. ; R. W. Hafer, Joseph Haslag and Scott Hein examine two alternative monetary policies and gauge their expected impacts on economic activity. Both policies are simulated over the period 1987–92. One policy, a GNP-targeting rule similar to one proposed by Bennett McCallum, slows nominal GNP growth substantially. Simulated nominal GNP, however, is quite volatile under the GNP-targeting rule. The other policy, referred to in the article as the M2-targeting approach would have resulted in somewhat faster average nominal GNP growth compared with what actually occurred, the start-and-stop pattern exhibited during the recent U.S. recovery would still be present. Thus,...

Business Cycle and Monetary Policy Analysis with Market Rigidities and Financial Frictions

SSRN Electronic Journal, 2000

We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (real rigidities in the financial sector). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium.

Monetary policy in a stochastic equilibrium model with real and nominal rigidities

1998

A dynamic stochastic general-equilibrium (DSGE) model with real and nominal rigidities succeeds in capturing some key nominal features of U.S. business cycles. Additive technology shocks, as well as multiplicative shocks, are introduced. Monetary policy is specified following the developments in the structural vector autoregression (VAR) literature. Interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy. The model is estimated by maximum likelihood on U.S. data, and its fit is comparable to that of an unrestricted first-order VAR. Besides producing reasonable impulse responses and second moments, this model replicates a feature of U.S. business cycles, never captured by previous research with DSGE models, that an increase in interest rates predicts a decrease in output two to six quarters in the future. Finally, some policy implications are discussed.

Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy

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.

MONETARY POLICY RULES AND BUSINESS CYCLE CONDITIONS*

The Manchester School, 2011

This paper estimates a threshold monetary policy rule model for the USA, UK and Japan to investigate if monetary policy changes depend on business cycle conditions, i.e. recessions and expansions of the economy. Then, the paper evaluates the policy implications of this monetary policy rule. Using a long span of data, the paper provides clear‐cut evidence that, while during expansions

Nominal Rigidities, Monetary Policy and Pigou Cycles

The Economic Journal, 2013

Capturing the boom phase of Pigou cycles and resolving the comovement problem requires positive sectoral comovement. This paper addresses these observations using a two sector New Keynesian model. Price rigidities dampen movements in the relative price of durables following a monetary policy shock. Durables and nondurables are estimated to be complements in utility, allowing for a resolution of the comovement problem for modest degrees of price rigidity. Nominal rigidities also make firms forward-looking in their pricing behaviour which leads to relative price dynamics that generate positive sectoral comovement in the boom phase of a Pigou cycle.