Monetary Policy Implications
Friday, Jan. 5, 2018 8:00 AM - 10:00 AM
- Chair: Scott Dressler, Villanova University
Monetary Policy and Asset Price Bubbles
AbstractThis paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate bubble indicators for the stock and housing markets in the United States (US), based on different approaches proposed in the literature. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles whereas expansionary policies do fuel stock market bubbles. This result is confirmed on Euro area data. In addition, we find that US expansionary interest rate policies would inflate stock price bubbles while expansionary balance-sheet measures would lessen the bubble component of asset prices.
Monetary Policy Implications of State-dependent Prices and Wages
AbstractThis paper studies the dynamic general equilibrium effects of monetary policy shocks in a “control cost” model of state-dependent retail price adjustment and state-dependent wage adjustment. Both suppliers of retail goods and suppliers of labor are monopolistic competitors subject to idiosyncratic productivity shocks and nominal rigidities. Nominal rigidity arises because precise choice is costly: decision-makers tolerate errors both in the timing of price and wage adjustments, and in the new level at which the price or wage is set, because achieving perfect precision in these decisions would be excessively costly. The model is calibrated to data on the size and frequency of price and wage adjustments. We find that sticky wages by themselves account for much of the nonneutrality that occurs in the model where both sticky wages and sticky prices are present. Hence, a model in which both prices and wages are sticky implies substantially larger real effects of monetary shocks than does a model with sticky prices only.
Monetary Policy Under Behavioral Expectations: Theory and Experiment
AbstractExpectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposite theoretical predictions in a learning to forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit