Gomes, Orlando (2006): Monetary policy and economic growth: combining short and long run macro analysis.
Download (201kB) | Preview
The new Keynesian monetary policy model studies the response of the inflation – output gap trade-off to policy decisions taken by the Central Bank, concerning the nominal interest rate time trajectory. Under an optimal setup, this model displays a saddle-path stable equilibrium and, if the stable trajectory is followed, the steady state is characterized by an inflation rate that coincides with the selected inflation target. A high inflation target has positive effects over the rise of effective output relatively to its potential level (the monetary policy problem captures this effect), but it has a perverse impact over investment decisions (the referred problem does not capture this effect, taking it as granted). This second relation can be understood by associating to the first macro model a second setup, which takes consumption and investment decisions, i.e., by considering a long term growth setup. The link between the two is present on the impact of inflation over investment decisions. With this integrated framework one is able to simultaneously study short and long-run macroeconomic phenomena and to jointly analyze the behaviour of nominal and real aggregates. The most important results consist on the determination of an optimal inflation target and on the consideration of short term supply shocks as having a long-run impact producing business cycles.
|Item Type:||MPRA Paper|
|Institution:||Escola Superior de Comunicação Social - Instituto Politécnico de Lisboa|
|Original Title:||Monetary policy and economic growth: combining short and long run macro analysis|
|Keywords:||Monetary policy; Economic growth; Inflation targeting; Output gap|
|Subjects:||C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C61 - Optimization Techniques; Programming Models; Dynamic Analysis
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Orlando Gomes|
|Date Deposited:||20. Apr 2007|
|Last Modified:||16. Feb 2013 09:54|
Akerlof, G.; W. Dickens and G. Perry (2001). “Options for Stabilization Policy.” The Brookings Institution Policy Brief, nº69, pp. 1-8. Christiano, L. and M. Eichenbaum (1992). “Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations.” American Economic Review, vol. 82, pp. 430-450. Clarida, R.; J. Gali and M. Gertler (1999). “The Science of Monetary Policy: A New Keynesian Perspective.” Journal of Economic Literature, vol. 37, pp. 1661-1707. Clark, P.; D. Laxton and D. Rose (1996). “Asymmetry in the U.S. Output-Inflation Nexus.” IMF Staff Papers, vol. 43, pp. 216-251. Cukierman, A. (2000). “The Inflation Bias Result Revisited.” Tel-Aviv University working paper. Debelle, G. and D. Laxton (1997). “Is the Phillips Curve Really a Curve? Some Evidence for Canada, the UK and the US.” IMF Staff Papers, 44. Dolado, J.; R. Pedrero and F. J. Ruge-Murcia (2004). “Nonlinear Monetary Policy Rules: Some New Evidence for the U.S.” Studies in Nonlinear Dynamics & Econometrics, vol. 8, issue 3, article 2, pp. 1-32. Gali, J. (2002). “New Perspectives on Monetary Policy, Inflation, and the Business Cycle.” NBER working paper nº 8767. Gali, J.; S. Gerlach; J. Rotemberg; H. Uhlig and M. Woodford (2004). “The Monetary Policy of the ECB Reconsidered.” Monitoring the European Central Bank 5. London: Centre for Economic Policy Research. Jensen, C. (2005). “Expectations, Learning and Discretionary Policymaking.” Southern Methodist University working paper. Jones, L. E.; R. E. Manuelli and H. E. Siu (2000). “Growth and Business Cycles.” Federal Reserve Bank of Minneapolis Research Department Staff Report 271. King, R. G.; C. Plosser and S. Rebelo (1988). “Production, Growth and Business Cycles: I. The Basic Neoclassical Model.” Journal of Monetary Economics, vol. 21, pp. 195-232. King, R. G. and S. Rebelo (1999). “Resuscitating Real Business Cycles.” in J. Taylor and M. Woodford (eds.), Handbook of Macroeconomics, vol. 1B, pp. 928-1002. Kydland, F. E. and E. C. Prescott (1977). “Rules Rather than Discretion: the Inconsistency of Optimal Plans.” Journal of Political Economy, vol. 85, pp. 473-491. Kydland, F. and E. C. Prescott (1982). “Time to Build and Aggregate Fluctuations.” Econometrica, vol. 50, pp. 1345-1370. Long, J. B. and C. I. Plosser (1983). “Real Business Cycles.” Journal of Political Economy, vol. 91, pp. 39-69. Lucas, R. E. (1972). “Expectations and the Neutrality of Money.” Journal of Economic Theory, vol. 4, pp. 103-124. Lucas, R. E. (1988). “On the Mechanics of Economic Development.” Journal of Monetary Economics, vol. 22, pp. 3-42. Nobay, R. A. and D. A. Peel (2003). “Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences.” Economic Journal, vol. 113, pp. 657-665. Phelps, E. S. (1970). “Introduction: the New Microeconomics in Employment and Inflation Theory.” In E. S. Phelps, A. A. Alchian, C. C. Holt, D. T. Mortensen, G. C. Archibald, R. E. Lucas, L. A. Rapping, S. G. Winter, J. P. Gould, D. F. Gordon, A. Hynes, D. A. Nichols, P. J. Taubman,, and M. Wilkinson, Microeconomic Foundations of Employment and Inflation Theory, New York: Norton. Rebelo, S. (2005). “Real Business Cycle Models: Past, Present and Future.” Rochester Center for Economic Research, working paper nº 522. Romer, P. M. (1990). “Endogenous Technological Change.” Journal of Political Economy, vol. 98, pp. S71-S102. Ruge-Murcia, F. J. (2002). “A Prudent Central Banker.” IMF Staff Papers, vol. 49, pp. 456-469. Ruge-Murcia, F. J. (2004). “The Inflation Bias when the Central Banker Targets the Natural Rate of Unemployment.” European Economic Review, vol. 48, pp. 91-107. Schalling, E. (1999). “The Nonlinear Phillips Curve and Inflation Forecast Targeting.” Bank of England working paper nº 98. Solow, R. M. (1956). “A Contribution to the Theory of Economic Growth.” Quarterly Journal of Economics, vol.70, pp.65-94. Surico, P. (2004). “Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences.” Bocconi University working paper. Svensson, L. E. O. (1999). “Inflation Targeting as a Monetary Policy Rule.” Journal of Monetary Economics, vol. 43, pp. 607-654. Svensson, L. E. O. and M. Woodford (2003). “Implementing Optimal Policy through Inflation-Forecast Targeting.” NBER’s Conference on Inflation Targeting, Bal Harbour, Florida. Tambakis, D. N. (1999). “Monetary Policy with a Nonlinear Phillips Curve and Asymmetric Loss.” Studies in Nonlinear Dynamics and Econometrics, vol. 3, pp. 223-237. Woodford, M. (1999). “Optimal Monetary Policy Inertia.” NBER working paper nº 7261. Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, New Jersey: Princeton University Press.