Balfoussia, Hiona and Brissimis, Sophocles and Delis, Manthos D (2011): The theoretical framework of monetary policy revisited.
Download (140kB) | Preview
The three-equation New-Keynesian model advocated by Woodford (2003) as a self-contained system on which to base monetary policy analysis is shown to be inconsistent in the sense that its long-run static equilibrium solution implies that the interest rate is determined from two of the system’s equations, while the price level is left undetermined. The inconsistency is remedied by replacing the Taylor rule with a standard money demand equation. The modified system is seen to possess the key properties of monetarist theory for the long run, i.e. monetary neutrality with respect to real output and the real interest rate and proportionality between money and prices. Both the modified and the original New-Keynesian models are estimated on US data and their dynamic properties are examined by impulse response analysis. Our research suggests that the economic and monetary analysis of the European Central Bank could be unified into a single framework.
|Item Type:||MPRA Paper|
|Original Title:||The theoretical framework of monetary policy revisited|
|Keywords:||Monetary theory; Central banking; New-Keynesian model; Impulse response analysis|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation: Models and Applications
|Depositing User:||Manthos Delis|
|Date Deposited:||14. Jul 2011 13:08|
|Last Modified:||12. Feb 2013 21:41|
Abel, A.B., Bernanke, B.S., 1992. Macroeconomics. Addison-Wesley, New York.
Andrés, J., Lopez-Salido, J.D., Nelson, E., 2009. Money and the natural rate of interest: Structural estimates for the United States and the euro area. Journal of Economic Dynamics and Control 33, 758-776.
Ball, L., 2001. Another look at long-run money demand. Journal of Monetary Economics 47, 31-44.
Bekaert, G., Cho, S., Moreno, A., 2010. New-Keynesian macroeconomics and the term structure. Journal of Money, Credit, and Banking 42, 33-62.
Benati, L., Vitale, G., 2007. Joint estimation of the natural rate of interest, the natural rate of unemployment, expected inflation, and potential output. European Central Bank Working Paper Series No. 797.
Berger, H., Harjes, T., Stavrev, E., 2008. The ECB’s monetary analysis revisited. IMF Working Paper WP/08/171.
Bernanke, B.S., 2003. Friedman’s monetary framework: Some lessons. Proceedings, Federal Reserve Bank of Dallas, Oct, 207-214.
Beyer, A., Farmer, R.E.A., 2003. Identifying the monetary transmission mechanism using structural breaks. European Central Bank Working Paper Series No. 275.
Blanchard, O., Dell’Ariccia, G., Mauro, P., 2010. Rethinking macroeconomic policy. IMF Staff Position Note SPN/10/03.
Brissimis, S.N., 1976. Multiplier effects for higher than first order linear dynamic econometric models. Econometrica 44, 593-595.
Brissimis, S.N., Leventakis, J.A., 1984, An empirical inquiry into the short- run dynamics of output, prices and exchange market pressure. Journal of International Money and Finance 3, 75-89.
Brissimis, S.N., Magginas, N.S., 2008. Inflation forecasts and the New Keynesian Phillips curve. International Journal of Central Banking 4, 1-22.
Brissimis, S.N., Migiakis, P., 2011. Inflation persistence and the rationality of inflation expectations. MPRA Paper 29052, University Library of Munich, Germany.
Calvo, G.A., 1983. Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383-398.
Cho, S., Moreno, A., 2006. A small-sample study of the New-Keynesian macro model. Journal of Money, Credit, and Banking 38, 1461-1481.
Christiano, L., Motto, R., Rostagno, M., 2007. Two reasons why money and credit may be useful in monetary policy. NBER Working Paper Series No. 13502.
Cochrane, J.H., 2007. Inflation determination with Taylor rules: A critical review. NBER Working Paper Series No. 13409.
Cochrane, J.H., 2009. Can learnability save New-Keynesian models? Journal of Monetary Economics 56, 1109-1113.
Dennis, R., 2005. Specifying and estimating New Keynesian models with instrument rules and optimal monetary policies. Federal Reserve Bank of San Francisco Working Paper 2004-17.
Dupuis, D., 2004. The New Keynesian hybrid Phillips curve: An assessment of competing specifications for the United States. Bank of Canada Working Paper 2004-31.
Evans, G.W., Honkapohja, S., 2001. Learning and Expectations in Macroeconomics. Princeton University Press, Princeton.
Friedman, M., 1963. Inflation: Causes and Consequences. Asia Publishing House, New York.
Fuhrer, J. C., 2000. Habit formation and its implications for monetary- policy models. American Economic Review 90, 367- 390.
Fuhrer, J. C., Rudebusch, G.D., 2004. Estimating the Euler equation for output. Journal of Monetary Economics 51, 1133-1153.
Gali, J., Gertler, M., 1999. Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195-222.
Gali, J., Gertler, M., Lopez-Salido, J.D., 2001. European inflation dynamics. European Economic Review 45, 1237-1270.
Gali, J., Gertler, M., Lopez-Salido, D.J., 2005. Robustness of the estimates of the hybrid New Keynesian Phillips curve. Journal of Monetary Economics 52, 1107-1118.
Gill, L., Brissimis, S.N., 1978. Polynomial operators and the asymptotic distribution of dynamic multipliers. Journal of Econometrics 7, 373-384.
Goodfriend, M., King, R.G., 1997. The new neoclassical synthesis and the role of monetary policy. NBER Macroeconomics Annual 12, 231-283.
Hamilton, J.D., 1994. Time Series Analysis. Princeton University Press, Princeton.
Inoue, T., Tsuzuki, E., 2011. A New Keynesian model with technological change. Economics Letters 110, 206-208.
Ireland, P., 2004. Money’s role in the monetary business cycle. Journal of Money, Credit, and Banking 36, 969-983.
Klein, P., 2000. Using the generalized Schur form to solve a multivariate linear rational expectations model. Journal of Economic Dynamics and Control 24, 1405-1423.
Lucas, R.E., 2007. Central banking: Is science replacing art? In: Monetary Policy: A Journey from Theory to Practice. European Central Bank, pp. 168-171.
McCallum, B.T., 2000. Alternative monetary policy rules: A comparison with historical settings for the United States, the United Kingdom, and Japan. Economic Quarterly, Federal Reserve Bank of Richmond, Winter Issue, 49-79.
McCallum, B.T., 2001. Monetary policy analysis in models without money. Federal Reserve Bank of St. Louis Review 83, 145-160.
McCallum, B,T., 2008. How important is money in the conduct of monetary policy? A comment. Journal of Money, Credit, and Banking 40, 1783-1790.
McCallum, B.T., 2009a. Inflation determination with Taylor rules: Is the New-Keynesian analysis critically flawed? Journal of Monetary Economics 56, 1101-1108.
McCallum, B.T., 2009b. Rejoinder to Cochrane. Journal of Monetary Economics 56, 1114-1115.
McCallum, B.T., 2010. Michael Woodford’s contributions to monetary economics. In: Wieland, V. (Ed.), The Science and Practice of Monetary Policy Today. Springer, Berlin, pp 3-8.
McCallum, B.T., Nelson, E., 1999. Performance of operational policy rules in an estimated semi-classical structural model. In Taylor, J.B. (Ed.), Monetary Policy Rules, Chicago University Press, Chicago, pp.15-45.
Nelson, E., 2003. The future of monetary aggregates in monetary policy analysis. Journal of Monetary Economics 50, 1029-1059.
Nelson, E., 2008. Why money growth determines inflation in the long run: Answering the Woodford critique. Journal of Money, Credit, and Banking 40, 1791-1814.
Newey, W.K., West, K.D, 1987. A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55, 703-708.
Newey, W.K., West, K.D., 1994. Automatic lag selection in covariance matrix estimation. Review of Economic Studies 61, 631-653.
Orphanides, A., 2003. Historical monetary policy analysis and the Taylor rule. Journal of Monetary Economics 50, 983-1022.
Papademos, L., 2008. The role of money in the conduct of monetary policy. In: Beyer, A., Reichlin, L. (Eds.) The Role of Money: Money and Monetary Policy in the Twenty-First Century, European Central Bank, pp. 194-205.
Pesaran, M.H., Smith, R.P., 2011. Beyond the DSGE straitjacket. Cambridge Working Papers in Economics No. 1138.
Rotemberg, J.J., Woodford, M., 1997. An optimization-based econometric framework for the evaluation of monetary policy. NBER Macroeconomics Annual 12, 297-346.
Rotemberg, J.J., Woodford, M., 1999. Interest rate rules in an estimated sticky price model. In: Taylor J.B. (Ed.), Monetary Policy Rules, Chicago University Press, Chicago, pp. 57-119.
Rudebusch, G.D., 2002. Term structure evidence on interest rate smoothing and monetary policy inertia. Journal of Monetary Economics 49, 1161-1187.
Shapiro, A.H., 2008. Estimating the New Keynsesian Phillips curve: A vertical production chain approach. Journal of Money, Credit, and Banking 40, 627-666.
Sims, C.A., 2002. Solving linear rational expectations models. Computational Economics 20, 1-20.
Smets, F., Wouters, R., 2003. An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 1123-1175.
Smets, F., Wouters, R., 2004. Forecasting with a Bayesian DSGE model: An application to the euro area. Journal of Common Market Studies 42, 841-867.
Wallis, K.F., Whitley, J.D., 1987. Long-run properties of large-scale macroeconometric models. Annales d'Economie et de Statistique, No. 6-7, 207-224.
Woodford, M., 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press, Princeton.
Woodford, M., 2008. How important is money in the conduct of monetary policy? Journal of Money, Credit, and Banking 40, 1561-1598.
Woodford, M., 2009. Convergence in macroeconomics: Elements of the new synthesis. American Economic Journal: Macroeconomics 1, 267-279.
Available Versions of this Item
- The theoretical framework of monetary policy revisited. (deposited 14. Jul 2011 13:08) [Currently Displayed]