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Athanasios Orphanides - One of the best experts on this subject based on the ideXlab platform.
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economic projections and Rules of thumb for monetary policy
Canadian Parliamentary Review, 2008Co-Authors: Athanasios Orphanides, Volker WielandAbstract:Monetary policy analysts often rely on Rules-of-thumb, such as the Taylor Rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple Rule and examination of the reasons behind such deviations. One interesting question is whether such Rules-of-thumb should draw on policymakers' forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor Rule that relies on outcomes may be due to systematic responses to information captured in policymakers' own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based Rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style Rule may be considered systematic responses to information contained in FOMC projections.
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historical monetary policy analysis and the Taylor Rule
Social Science Research Network, 2003Co-Authors: Athanasios OrphanidesAbstract:This study examines the usefulness of the Taylor-Rule framework as an organizing device for describing the policy debate and evolution of monetary policy in the United States. Monetary policy during the 1920s and since the 1951 Treasury-Federal Reserve Accord can be broadly interpreted in terms of this framework with rather surprising consistency. In broad terms, during these periods policy has been generally formulated in a forward-looking manner with price stability and economic stability serving as implicit or explicit guides. As early as the 1920s, measures of real economic activity relative to "normal" or "potential" supply appear to have influenced policy analysis and deliberations. Confidence in such measures as guides for activist monetary policy proved counterproductive at times, resulting in excessive activism, such as during the Great Inflation and at the brink of the Great Depression. Policy during the past two decades is broadly consistent with natural-growth targeting variants of the Taylor Rule that exhibit less activism.
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activist stabilization policy and inflation the Taylor Rule in the 1970s
Social Science Research Network, 2000Co-Authors: Athanasios OrphanidesAbstract:A number of recent studies have suggested that activist stabilization policy Rules responding to inflation and the output gap can attain simultaneously a low and stable rate of inflation as well as a high degree of economic stability. The foremost example of such a strategy is the policy Rule proposed by Taylor (1993). In this paper, I demonstrate that the policy settings that would have been suggested by this Rule during the 1970s, based on real-time data published by the U.S. Commerce Department, do not greatly differ from actual policy during this period. To the extent macroeconomic outcomes during this period are considered unfavorable, this raises questions regarding the usefulness of this strategy for monetary policy. To the extent the Taylor Rule is believed to provide a reasonable guide to monetary policy, this finding raises questions regarding earlier critiques of monetary policy during the 1970s.
Michael Woodford - One of the best experts on this subject based on the ideXlab platform.
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credit frictions and optimal monetary policy
National Bureau of Economic Research, 2015Co-Authors: Vasco Cúrdia, Michael WoodfordAbstract:We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterises optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor Rule", in which the intercept of the Taylor Rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor Rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a Rule of thumb remains inferior to the targeting Rule. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Olivier Blanchard and Charles Goodhart.
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credit spreads and monetary policy
Journal of Money Credit and Banking, 2010Co-Authors: Vasco Cúrdia, Michael WoodfordAbstract:We consider the desirability of modifying a standard Taylor Rule for a central bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor [2008] and by McCulley and Toloui [2008]) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al. [2007]). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in Curdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Taylor Rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor Rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even the right sign) of the response to credit is less robust to alternative assumptions about the nature and persistence of disturbances.
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Credit Frictions and Optimal Monetary Policy
SSRN Electronic Journal, 2008Co-Authors: Vasco Cúrdia, Michael WoodfordAbstract:We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We flnd that the mere existence of a positive average spread makes little quantitative difierence for the predicted efiects of particular policies. Variation in spreads over time is of greater signiflcance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and in∞ation. Nonetheless, we flnd that the target criterion { a linear relation that should be maintained between the in∞ation rate and changes in the output gap | that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a \spread-adjusted Taylor Rule," in which the intercept of the Taylor Rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor Rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a Rule of thumb remains inferior to the targeting Rule.
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the Taylor Rule and optimal monetary policy
The American Economic Review, 2001Co-Authors: Michael WoodfordAbstract:where it denotes the Fed’s operating target for the federal funds rate, pt is the inflation rate (measured by the GDP deflator), yt is the log of real GDP, and y# t is the log of potential output (identified empirically with a linear trend). The Rule has since been subject to considerable attention, both as an account of actual policy in the United States and elsewhere, and as a prescription for desirable policy. Taylor argues for the Rule’s normative significance both on the basis of simulations and on the ground that it describes U.S. policy in a period in which monetary policy is widely judged to have been unusually successful (Taylor, 1999), suggesting that the Rule is worth adopting as a principle of behavior. Here I wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend. I consider the question in the context of a simple, but widely used, optimizing model of the monetary transmission mechanism, which allows one to reach clear conclusions about economic welfare. The model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity. Out of concern for the robustness of the conclusions reached, the analysis here addresses only broad, qualitative features of the Taylor Rule and attempts to identify features of a desirable policy Rule that are likely to hold under a variety of model specifications.
Nicolas Groshenny - One of the best experts on this subject based on the ideXlab platform.
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monetary policy inflation and unemployment in defense of the federal reserve
Macroeconomic Dynamics, 2013Co-Authors: Nicolas GroshennyAbstract:To what extent did deviations from the Taylor Rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, I estimate a New Keynesian model with unemployment and perform a counterfactual experiment where monetary policy strictly follows a Taylor Rule over the period 2002:Q1–2006:Q4. I find that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8% would have been as high as 80%, whereas the probability of an inflation rate above 1% would have been close to zero.
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monetary policy inflation and unemployment in defense of the federal reserve
Social Science Research Network, 2010Co-Authors: Nicolas GroshennyAbstract:To what extent did deviations from the Taylor Rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, this paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor Rule over the period 2002:Q1 - 2006:Q4. The paper finds that such a policy would have generated a sizable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero.
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monetary policy inflation and unemployment in defense of the federal reserve
Research Papers in Economics, 2010Co-Authors: Nicolas GroshennyAbstract:To what extent did deviations from the Taylor Rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, this paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor Rule over the period 2002:Q1 - 2006:Q4. The paper finds that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero.
Ralf Kirsten - One of the best experts on this subject based on the ideXlab platform.
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Ramsey Optimal Policy in the New-Keynesian Model with Public Debt
2020Co-Authors: Chatelain Jean-bernard, Ralf KirstenAbstract:In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-Rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor Rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-Rule parameter implies the local stability of public-debt dynamics ("passive" fiscal policy)
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Hopf Bifurcation from new-Keynesian Taylor Rule to Ramsey Optimal Policy
'Cambridge University Press (CUP)', 2020Co-Authors: Chatelain Jean-bernard, Ralf KirstenAbstract:International audienceThis paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor Rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory
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Hopf Bifurcation from new-Keynesian Taylor Rule to Ramsey Optimal Policy
'Cambridge University Press (CUP)', 2020Co-Authors: Chatelain Jean-bernard, Ralf KirstenAbstract:This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor Rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory.Comment: Macroeconomic Dynamics, Cambridge University Press (CUP), 202
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Ramsey Optimal Policy in theNew-Keynesian Model with Public Debt
'Cambridge University Press (CUP)', 2020Co-Authors: Chatelain Jean-bernard, Ralf KirstenAbstract:International audienceIn the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-Rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor Rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-Rule parameter implies the local stability of public-debt dynamics (“passive” fiscal policy)
Ansgar Belke - One of the best experts on this subject based on the ideXlab platform.
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A Service of zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics R O M E Does the ECB Rely on a Taylor Rule? Comparing Ex-post with Real Time Data Does the ECB Rely on a Taylor Rule? Comparing Ex-Post with Real Time Data
2020Co-Authors: Ansgar Belke, Jens Klose, Prof Jens Klose, Econ Jens Klose, Albrecht F MichlerAbstract:Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Terms of use: Documents in R O M E Research On Money in the Economy ROME Discussion Paper Series "Research on Money in the Economy" (ROME) is a private non-profit-oriented research network of and for economists, who generally are interested in monetary economics and especially are interested in the interdependences between the financial sector and the real economy. Further information is available on www.rome-net.org. ISSN 1865-7052 No. The discussion paper represent the authors' personal opinions and do not necessarily reflect the views of DIW Berlin and the Institute for the Study of Labor (IZA) Bonn. NOTE: Working papers in the "Research On Money in the Economy" Discussion Paper Series are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the author(s) and do not indicate concurrence by other members of the research network ROME. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the author(s). References in publications to ROME Discussion Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author(s) to protect the tentative character of these papers. As a general Rule, ROME Discussion Papers are not translated and are usually only available in the original language used by the contributor(s). ROME Discussion Papers are published in PDF format at www.rome-net.org/publications/ . Please direct any enquiries to the current ROME coordinator Prof. Dr. Albrecht Abstract We assess the differences that emerge in Taylor Rule estimations for the ECB when using expost data instead of real time forecasts and vice versa. We argue that previous comparative studies in this field mixed up two separate effects. First, the differences resulting from the use of ex-post and real time data per se and, second, the differences emerging from the use of non-modified real time data instead of real-time data based forecasted values and vice versa. Since both effects can influence the reaction to inflation and the output gap either way, we use a more clear-cut approach to disentangle the partial effects. Our estimation results indicate that using real time instead of ex post data leads to higher estimated inflation coefficients while the opposite is true for the output gap coefficients. If real time data forecasts for the current period are used (since actual data become available with a lag), this empirical pattern is even strengthened in the sense of even increasing the inflation response but lowering the reaction to the output gap while the reverse is true if "true" forecasts of real time data for several periods are employed. JEL-Classification: E43, E5
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how do the ecb and the fed react to financial market uncertainty the Taylor Rule in times of crisis
Ruhr Economic Papers, 2010Co-Authors: Ansgar Belke, Jens KloseAbstract:We assess differences that emerge in Taylor Rule estimations for the Fed and the ECB before and after the start of the subprime crisis. For this purpose, we apply an explicit estimate of the equilibrium real interest rate and of potential output in order to account for variations within these variables over time. We argue that measures of money and credit growth, interest rate spreads and asset price infl ation should be added to the classical Taylor Rule because these variables are proxies of a change in the equilibrium interest rate and are, thus, also likely to have played a major role in setting policy rates during the crisis. Our empirical results gained from a state-space model and GMM estimations reveal that, as far as the Fed is concerned, the impact of consumer price inflation, and money and credit growth turns negative during the crisis while the sign of the asset price inflation coefficient turns positive. Thus we are able to establish significant differences in the parameters of the reaction functions of the Fed before and after the start of the subprime crisis. In case of the ECB, there is no evidence of a change in signs. Instead, the positive reaction to credit growth, consumer and house price inflation becomes even stronger than before. Moreover we find evidence of a less inertial policy of both the Fed and the ECB during the crisis.
