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| Author | : Christopher J. Erceg |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 1998 |
| Genre | : Inflation (Finance) |
| ISBN | : |
| Author | : Christopher J. Erceg |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2006 |
| Genre | : |
| ISBN | : |
We demonstrate the existence of a monetary policy tradeoff between price-inflation variability and output-gap variability in an optimizing-agent model with staggered nominal wage and price contracts. This variance tradeoff is absent only in the special case in which prices are sticky and wages are perfectly flexible. When the model is calibrated to exhibit an empirically reasonable degree of nominal wage inertia, strict inflation targeting induces substantial output-gap volatility.
| Author | : |
| Publisher | : |
| Total Pages | : 313 |
| Release | : 1970 |
| Genre | : Korea |
| ISBN | : |
| Author | : Christopher J. Erceg |
| Publisher | : |
| Total Pages | : 56 |
| Release | : 1998 |
| Genre | : Econometric models |
| ISBN | : |
| Author | : Davide Debortoli |
| Publisher | : International Monetary Fund |
| Total Pages | : 56 |
| Release | : 2017-07-21 |
| Genre | : Business & Economics |
| ISBN | : 1484311752 |
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
| Author | : Christopher J. Erceg |
| Publisher | : |
| Total Pages | : 50 |
| Release | : 1999 |
| Genre | : Employment (Economic theory) |
| ISBN | : |
We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot replicate the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff between stabilizing the output gap, price inflation, and wage inflation. The Pareto optimum is attainable only if either wages or prices are completely flexible. For reasonable calibrations of the model, we characterize the optimal policy rule. Furthermore, strict price inflation targeting is clearly suboptimal, whereas rules that also respond to either the output gap or wage inflation are nearly optimal.
| Author | : Mr.Esteban Jadresic |
| Publisher | : International Monetary Fund |
| Total Pages | : 40 |
| Release | : 1999-04-01 |
| Genre | : Business & Economics |
| ISBN | : 1451848153 |
This paper reexamines the effects of inflation targeting on output stability. It considers an economy with staggered price setting that is exposed to price shocks and where the policymaker cannot observe the current realizations of aggregate output and inflation. The paper shows that, if some price shocks can be anticipated, the effects of inflation targeting depend critically on the inflation indicator being targeted. Specifically, targeting headline inflation can severely destabilize output, while targeting inflation indicator of sticky prices may eliminate that problem and make the response of the output gap to aggregate shocks short-lived.
| Author | : Christopher J. Erceg |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 1999 |
| Genre | : Labor demand |
| ISBN | : |
We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot replicate the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff between stabilizing the output gap, price inflation, and wage inflation. The Pareto optimum is attainable only if either wages or prices are completely flexible. For reasonable calibrations of the model, we characterize the optimal policy rule. Furthermore, strict price inflation targeting is clearly suboptimal, whereas rules that also respond to either the output gap or wage inflation are nearly optimal.
| Author | : Jeffrey C. Fuhrer |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 1998 |
| Genre | : |
| ISBN | : |
I estimate the inflation/output-gap variance trade-off faced by monetary policymakers in the U.S. For policymakers who care about deviations of inflation around target and output around potential, the estimated trade-off represents the "optimal policy frontier." Given the structure of the economy, policymakers can do no better than to attain weighted variances of inflation and output that lie on the frontier. I find that the variance trade-off becomes quite severe when the standard deviation of inflation or output drops much below 2%. This suggests that approximately balanced responses to policy goals are consistent with reasonable preferences over inflation and output variability.
| Author | : Davide Debortoli |
| Publisher | : International Monetary Fund |
| Total Pages | : 56 |
| Release | : 2017-07-19 |
| Genre | : Business & Economics |
| ISBN | : 1484309278 |
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
