Billions of dollars worth of shares are traded in the stock market on a daily basis. Many people depend on the stock market as their primary source of income while others have their retirement funds tied to the stock market. The importance of “good” performance of the stock market is obvious. History has shown that a downturn in stock prices can cause major disturbances in the lives of many. Al...

In this paper, we re-examine the empirical relevance of the cost channel of monetary policy. We employ recently developed moment-conditions inference procedures, which provide a more e¢ cient and reliable econometric framework than in previous literature. Using US data, our results suggest that there is no substantial evidence for the existence of a cost channel. Keywords: Cost channel; Phillip...

In many countries, the monetary policy instrument remains unchanged for a long period and shows infrequent responses to exogenous shocks. The purpose of this paper is to provide a new explanation on why the central bank’s policy instrument remains so unchanged. In the following analysis, we explore how Knightian uncertainty affects optimal monetary policy. We apply the Choquet expected decision...

Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking an...

-Monetary policy operates in a different environment than it did a decade ago. Financial market innovations have eroded the distinctions among monetary assets, making the definition of money increasingly arbitrary. Deregulation of interest rates and banking activity is changing the behavior of the monetary aggregates, as banks pay interest on monetary assets and nonbanks offer monetary-like ass...

The unconventional monetary policy of forward guidance operates through the management of expectations about future paths of interest rates. This paper examines the link between expectations formation and the effectiveness of forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macroeco...

This paper estimates and solves a multi-country version of the standard New Keynesian, MCNK, model. Modelling a large number of countries requires a range of methodological innovations. Each country has a Phillips curve determining inflation, an IS curve determining output, a Taylor Rule determining interest rates, and a real effective exchange rate equation. All variables are measured as devia...

This study captures regime-switching, monetary policy responses to financial market disturbances in Canada. Monetary policy is identified within a nonlinear, structural VAR framework with a regime-switching policy block that allows for contemporaneous policy reactions in a small open economy. The key finding is that monetary policy in Canada has undergone important changes in monetary policy re...