Monetary policy regimes and inflation in the new-Keynesian model
نویسنده
چکیده
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. 2014 Elsevier Inc. All rights reserved.
منابع مشابه
Evaluation of Monetary and Fiscal Policy Based on New Keynesian Dynamic General Equilibrium Model in Iran’s Economy
This paper examines monetary and fiscal policy through the estimation of a New-Keynesian dynamic general equilibrium model for Iran’s economy. In this New-Keynesian dynamic general equilibrium model, the consumers encounter the liquidity constraint and the firms face sticky prices, while they are changing them. In the model presented, a role is considered for both government spending and taxati...
متن کاملMonetary and Macro-prudential Policies: An Integrated Analysis
This paper studies the interaction between monetary and macro-prudential policies in a simple model with both nominal and financial frictions. The nominal friction gives rise to a conventional monetary policy objective emphasized in the New Keynesian literature. The financial friction, in the form of an occasionally binding collateral constraint, gives rise to a financial stability objective. ...
متن کاملThe Effects of Monetary Policy on Output and Inflation in Afghanistan: A Dynamic Stochastic General Equilibrium Approach
T he consequences of the decisions and policies taken for the reconstruction of Afghanistan during the past decade, showed that there should be paid more attention to the monetary policies. There is also a question that whether monetary policies have the potential to affect the production and inflation in Afghanistan or not. The aim of this paper is to explore this effect by designin...
متن کاملThe Impact of Monetary and Exchange Policies on the Country’s Trade balance Fluctuation with the Approach of Dynamic Stochastic General Equilibrium (DSGE) models
This paper uses the framework of new Keynesian school and the literature of the Dynamic Stochastic General Equilibrium (DSGE) model to build a general model that can be estimated for Iran economy. By simulating this model, the effects of the implementation of monetary and foreign exchange policies through policy instruments including bank interest rate, central bank international reserves and t...
متن کاملRobust Discretionary Monetary Policy under Cost-Push Shock Uncertainty of Iran’s Economy
T here is always uncertainty about the soundness of an economic model’s structure and parameters. Therefore, central banks normally face with uncertainty about the key economic explanatory relationships. So, policymaker should take into account the uncertainty in formulating monetary policies. The present study is aimed to examine robust optimal monetary policy under uncertainty, by ...
متن کاملMonetary and Fiscal Policy Interaction in Iran: A Dynamic Stochastic General Equilibrium Approach
Achieving the goals of price stability, sustainable economic growth, and the improvement of many economic variables require coordination between the monetary and financial authorities. In this study, a new modified Keynesian stochastic dynamic equilibrium general equilibrium model is introduced for Iran and in the framework of game theory, optimal policy of fiscal and monetary authorities are d...
متن کامل