Is a "Soft" Monetary Authority Appropriate?
Keywords:
Inflation Target, Monetary Authority, Dynamic Stochastic General Equilibrium Models, Taylor Rule, CredibilityAbstract
Taking the "objective inflation strategy" as a frame of reference, it is usual to discuss what is most convenient for a society in terms of the degree of "hardness" or "aggressiveness" of a monetary authority to defend its inflation target, and the credibility it has among the economic agents. In this document we use a Neo-Keynesian Stochastic Dynamic General Equilibrium (DSGE) model both with rational and adaptive expectations to analyze this question and we also quantify the effects of these two types of authorities on social welfare using an utility function. Our results suggest that the problem that can be derived from a "soft" authority is to risk the loss of credibility in its (supposed) effort to reach a certain inflation target. In addition, we present and use a solution of our model simple enough to allow other simulations related to this class of models to be implemented in a spreadsheet.References
Blanchard, O. J. and Kahn, C. M. (1980). The Solution of Linear Difference Models under Rational Expectations. Econometrica: Journal of the Econometric Society. 48(5),1305-1311.
Cagan, P. (1956). The Monetary Dynamics of Hyperination. Studies in the Quantity Theory of Money, ed. by Milton Friedman, Chicago University Press, Chicago.
Calvo, G. A. (1983). Staggered Prices in a Utility-Maximizing Framework. Journal of Monetary Economics, 12(3), 383-398.
Christiano, L. J. (2002). Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients. Computational Economics, 20(1-2):21-55.
Davis, J. M. (2007). “News and the Term Structure in General Equilibrium.” Unpublished Manuscript.
Dennis, R. (2004). Solving for Optimal Simple Rules in Rational Expectations Models. Journal of Economic Dynamics and Control, 28(8),1635-1660.
Fujiwara, I., Y. Hirose, and Shintani, M. (2008). “Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach.” IMES Discussion Paper 2008-E-16. Institute for Monetary and Economic Studies, Bank of Japan.
Galí, J. (2015). Monetary Policy, Inflation, and the Business Cycle: an Introduction to the New Keynesian Framework and its Applications. Princeton University Press.
Hans-Werner, W. and Winkler, R. (2009). On the Non-Optimality of Information: An Analysis of the Welfare Effects of Anticipated Shocks in the New Keynesian Model. Kiel Institute for the World Economy, Kiel. Working Paper No 1497.
Lubik, T. A. and Schorfheide, F. (2003). Computing Sunspots in Linear Rational Expectations Models. Working Paper 01-047, Penn Institute for Economic Research, University of Pennsylvania.
Lucas, R. E. (1972). Expectations and the Neutrality of Money. Journal of Economic Theory, 4(2),103-124.
Lucas, R. E. (1973). Some International Evidence on Output-Inflation Tradeoffs. The American Economic Review, 63(3):326-334.
Inter-American Development Bank (2017). Macroeconomic report "Roads to grow in a new commercial world". Washington.
Menz, J.O. and Vogel, L. (2009). A Detailed Derivation of the Sticky Price and Sticky Information New Keynesian DSGE Model. Technical report, DEP (Socioeconomics) Discussion Papers, Macroeconomics and Finance Series, Hamburg University.
Muth, J. F. (1961). Rational Expectations and the Theory of Price Movements. Econometrica: Journal of the Econometric Society, 29(3), 315-335.
Nerlove, M. (1958). Adaptive Expectations and Cobweb Phenomena. The Quarterly Journal of Economics, 72(2):227-240.
Romer, D. (2012). Advanced Macroeconomics. (Fourth Edition), McGraw-Hill.
Rotemberg, J. J. (1982). Sticky Prices in The United States. Journal of Political Economy, 90(6):1187-1211.
Sargent, T. J. and Wallace, N. (1976). Rational Expectations and The Theory of Economic Policy. Journal of Monetary Economics, 2(2),169-183.
Sims, C. A. (2002). Solving Linear Rational Expectations Models. Computational Economics, 20(1),1-20.
Svensson, L. E. (1997). Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets. European Economic Review, 41(6):1111-1146.
Taylor, J. B. (1993). Discretion versus Policy Rules in Practice. In Carnegie-Rochester conference series on public policy, v. 39, pp. 195-214.
Walsh, C. E. (2003). Monetary Theory and Policy. (Second Edition), MIT Press.
Wickens, M. (2008). Macroeconomics Theory: A dynamic general equilibrium approach. (Second Edition). Princeton University Press.
Williamson, S. (2014). Macroeconomics. (Fifth Edition), Pearson.
Woodford, M. (2002). Interest and Prices. Princeton University Press
Downloads
Published
Issue
Section
License