In this paper we study the role of the exchange rate in conducting monetary policy in an economy ... more In this paper we study the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates as experienced in Japan since the mid-1990s. Our analysis is based on an estimated model of Japan, the United States and the euro area with rational expectations and nominal rigidities. First, we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in Japan in terms of stabilizing output and inflation. Then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap. Finally, we investigate the international consequences of these proposals.
The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers... more The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that aim to better integrate the financial sector in business cycle analysis and deliver improved estimates of the transmission of monetary policy. In order to design effective policies policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments. This paper proposes a framework for comparative analysis of macrofinancial models and presents new tools and applications. It builds on and extends recent work on model comparison in the area of monetary and fiscal policy. The computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. It also contributes to improving reproducibility of computational research in macroeconomic modeling. An application presents compa...
This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips c... more This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms’ expect inflation to be highly persistent and opt for backwardlooking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation ...
In the aftermath of the global financial crisis and great recession, many countries face substant... more In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of n...
1. Gemas § 6 Absatz 1 des Gesetzes uber die Bildung eines Sachverstandigenrates zur Begutachtung ... more 1. Gemas § 6 Absatz 1 des Gesetzes uber die Bildung eines Sachverstandigenrates zur Begutachtung der gesamtwirtschaftlichen Entwicklung legt der Sachverstandigenrat sein 55. Jahresgutachten vor. Das Jahresgutachten 2018/19 tragt den Titel: Vor wichtigen wirtschaftspolitischen Weichenstellungen. 2. Die deutsche Volkswirtschaft steht vor grosen Herausforderungen. Auf internationaler Ebene ist dies vor allem die ungewisse Zukunft der multilateralen globalen Wirtschaftsordnung, auf nationaler Ebene der demografische Wandel. Beide betreffen Deutschland in besonderem Mase. Eine Starkung der Europaischen Union ware Teil der Antwort auf die internationalen Herausforderungen. Den Strukturwandel durch die Digitalisierung zuzulassen, wurde dabei helfen, die nationalen Herausforderungen zu meistern. Dies erfordert die richtigen wirtschaftspolitischen Weichenstellungen. […]
Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of fin... more Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of financial intermediaries, we investigate the performance of optimized macroprudential policy rules within and across models. Using three canonical banking DSGE models as a representative sample, we show that model-specific optimized macroprudential policy rules are highly heterogeneous across models and not robust to model uncertainty, implying large losses in other models. This is particularly the case for a perfect-coordination regime between monetary and macroprudential policy. A Stackelberg regime with the central bank as leader operating according to the rule by Orphanides and Wieland (2013) implies smaller potential costs due to model uncertainty. An even more effective approach for policymakers to insure against model uncertainty is to design Bayesian model-averaged optimized macroprudential rules. These prove to be more robust to model uncertainty by performing better across models ...
The purpose of the data presented in this article is to use it in ex post estimations of interest... more The purpose of the data presented in this article is to use it in ex post estimations of interest rate decisions by the European Central Bank (ECB), as it is done by Bletzinger and Wieland (2017) [1]. The data is of quarterly frequency from 1999 Q1 until 2013 Q2 and consists of the ECB's policy rate, inflation rate, real output growth and potential output growth in the euro area. To account for forward-looking decision making in the interest rate rule, the data consists of expectations about future inflation and output dynamics. While potential output is constructed based on data from the European Commission's annual macro-economic database, inflation and real output growth are taken from two different sources both provided by the ECB: the Survey of Professional Forecasters and projections made by ECB staff. Careful attention was given to the publication date of the collected data to ensure a real-time dataset only consisting of information which was available to the decisio...
We investigate the performance of forecast-based monetary policy rules using five macroeconomic m... more We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty; such rules respond to the one-year-ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. Finally, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.
In this paper we study the role of the exchange rate in conducting monetary policy in an economy ... more In this paper we study the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates as experienced in Japan since the mid-1990s. Our analysis is based on an estimated model of Japan, the United States and the euro area with rational expectations and nominal rigidities. First, we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in Japan in terms of stabilizing output and inflation. Then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap. Finally, we investigate the international consequences of these proposals.
The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers... more The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that aim to better integrate the financial sector in business cycle analysis and deliver improved estimates of the transmission of monetary policy. In order to design effective policies policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments. This paper proposes a framework for comparative analysis of macrofinancial models and presents new tools and applications. It builds on and extends recent work on model comparison in the area of monetary and fiscal policy. The computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. It also contributes to improving reproducibility of computational research in macroeconomic modeling. An application presents compa...
This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips c... more This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms’ expect inflation to be highly persistent and opt for backwardlooking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation ...
In the aftermath of the global financial crisis and great recession, many countries face substant... more In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of n...
1. Gemas § 6 Absatz 1 des Gesetzes uber die Bildung eines Sachverstandigenrates zur Begutachtung ... more 1. Gemas § 6 Absatz 1 des Gesetzes uber die Bildung eines Sachverstandigenrates zur Begutachtung der gesamtwirtschaftlichen Entwicklung legt der Sachverstandigenrat sein 55. Jahresgutachten vor. Das Jahresgutachten 2018/19 tragt den Titel: Vor wichtigen wirtschaftspolitischen Weichenstellungen. 2. Die deutsche Volkswirtschaft steht vor grosen Herausforderungen. Auf internationaler Ebene ist dies vor allem die ungewisse Zukunft der multilateralen globalen Wirtschaftsordnung, auf nationaler Ebene der demografische Wandel. Beide betreffen Deutschland in besonderem Mase. Eine Starkung der Europaischen Union ware Teil der Antwort auf die internationalen Herausforderungen. Den Strukturwandel durch die Digitalisierung zuzulassen, wurde dabei helfen, die nationalen Herausforderungen zu meistern. Dies erfordert die richtigen wirtschaftspolitischen Weichenstellungen. […]
Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of fin... more Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of financial intermediaries, we investigate the performance of optimized macroprudential policy rules within and across models. Using three canonical banking DSGE models as a representative sample, we show that model-specific optimized macroprudential policy rules are highly heterogeneous across models and not robust to model uncertainty, implying large losses in other models. This is particularly the case for a perfect-coordination regime between monetary and macroprudential policy. A Stackelberg regime with the central bank as leader operating according to the rule by Orphanides and Wieland (2013) implies smaller potential costs due to model uncertainty. An even more effective approach for policymakers to insure against model uncertainty is to design Bayesian model-averaged optimized macroprudential rules. These prove to be more robust to model uncertainty by performing better across models ...
The purpose of the data presented in this article is to use it in ex post estimations of interest... more The purpose of the data presented in this article is to use it in ex post estimations of interest rate decisions by the European Central Bank (ECB), as it is done by Bletzinger and Wieland (2017) [1]. The data is of quarterly frequency from 1999 Q1 until 2013 Q2 and consists of the ECB's policy rate, inflation rate, real output growth and potential output growth in the euro area. To account for forward-looking decision making in the interest rate rule, the data consists of expectations about future inflation and output dynamics. While potential output is constructed based on data from the European Commission's annual macro-economic database, inflation and real output growth are taken from two different sources both provided by the ECB: the Survey of Professional Forecasters and projections made by ECB staff. Careful attention was given to the publication date of the collected data to ensure a real-time dataset only consisting of information which was available to the decisio...
We investigate the performance of forecast-based monetary policy rules using five macroeconomic m... more We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty; such rules respond to the one-year-ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. Finally, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.
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