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Monetary policy is modeled as governed by a known rule, except for a time-varying target rate of inflation. The variable target is taken as representing either discretionary deviations from the rule, or as the outcome of a policymaking committee that is unable to arrive at a consensus....
Persistent link: https://www.econbiz.de/10014154059
Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity...
Persistent link: https://www.econbiz.de/10012745355
Many countries in the developing world have adopted an approach to monetary policy that focuses on maintaining a low level of inflation, to the exclusion of other important objectives such as employment generation, increasing investment or reducing poverty, despite the widespread evidence that...
Persistent link: https://www.econbiz.de/10014076155
In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper...
Persistent link: https://www.econbiz.de/10013004074
Central banks have recently done a dreadful job of stabilizing the path of nominal expenditures. The adverse demand shock of 2008–9 led to a severe recession in the United States and Europe. Monetary policy could be greatly improved with a regime of “targeting the forecast,” or setting...
Persistent link: https://www.econbiz.de/10012910546
This paper proposes that the Mundellian Trilemma remains valid despite the emergence of a world financial cycle. A clear distinction must be made between monetary policy independence and insulation of an open economy’s financial system. A flexible exchange rate allows an optimizing central...
Persistent link: https://www.econbiz.de/10013218373
We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada's adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible...
Persistent link: https://www.econbiz.de/10013161512
This paper studies the effect on monetary policy of a non-homogeneous degree of competition across the (two) members of a monetary union. In particular, we assess the welfare loss brought about by the use of a simple interest rate rule that does not take into account such structural differences....
Persistent link: https://www.econbiz.de/10012991378
We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the ZLB to bind, increasing unemployment. Higher government debt...
Persistent link: https://www.econbiz.de/10012591689
Since 1991, the Bank of Canada has had an inflation‐targeting (IT) framework established by a joint agreement between the Bank and the Government of Canada. The framework is reviewed every five years as part of the process for renewing the inflation‐control agreement. This discussion paper...
Persistent link: https://www.econbiz.de/10012613645