Download or read book Financial Frictions Business Cycles and Optimal Monetary Policy written by Zulfiqar Hyder and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The great recession that started in 2007, has not only changed the perspective of the macroeconomic literature about the role of financial frictions within the canonical New Keynesian (henceforth, NK) monetary models but also has rekindled the debate about sources of business cycle fluctuations. This dissertation, comprising of three self-contained essays, makes theoretical and empirical contributions to the emerging strands of literature incorporating financial frictions in the NK monetary models. The first essay (Chapter 2) of this dissertation extends traditional optimal monetary policy analysis to NK models with capital and financial frictions. In the case of a negative productivity shock, the chapter finds that: 1) a standard inflation targeting rule dominates the Taylor rule in both NK models without capital and with capital as it approximates the welfare level associated with the Ramsey policy; 2) in the NK model with capital and with financial frictions, the relative performance of the economy under standard inflation targeting is much better compared to alternative policies because it approximates Ramsey monetary policy. In the case of a financial shock, the chapter shows that the inflation targeting rule provides a welfare level that is close to the welfare level achieved under optimal monetary policy under commitment. In addition, Ramsey policy under commitment performs well in response to a financial shock, compared to alternative monetary policy regimes, by aggressively minimizing the impact of financial constraints on the interest rate spread. The second essay (Chapter 3) estimates the importance of financial shocks in business cycle fluctuations for the US economy using structural VAR models. In that chapter, financial and non-financial shocks are identified with a minimum set of sign restrictions based on the two competing NK models: the standard NK model augmented with a financial accelerator and the NK model augmented with financial intermediaries. Estimation results show that a financial shock, emanating both from entrepreneur's net worth and financial intermediaries net worth, is prominent in explaining fluctuations in real output and interest rate spread. As far as the relative importance of these two financial shocks is concerned, the following results stand out. A financial shock related to the demand side is relatively the major driver of output fluctuations in both time horizons while financial shocks related to financial intermediaries explain a moderate variation in output fluctuations in both time horizons. In addition, financial shocks related to financial intermediaries account for a relatively larger share of interest rate spread fluctuations at both time horizons compared to a financial shock related to the demand side. The third essay (Chapter 4) extends Gertler and Karadi's model (2011) into a two-sector setting. The Two-Sector Financial Accelerator model not only helps to incorporate the differences in the leverage ratios of commercial and investment banks but also introduces additional shocks that capture some features of the sub-prime financial crisis in the simulated economy. The results also show that output recovery would remain slow in the simulated economy as long as the relative price of non-consumption goods is not recovered to its trend.

Download or read book Output Gap in Presence of Financial Frictions and Monetary Policy Trade offs written by Francesco Furlanetto and published by International Monetary Fund. This book was released on 2014-07-18 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.

Download or read book Hysteresis and Business Cycles written by Ms.Valerie Cerra and published by International Monetary Fund. This book was released on 2020-05-29 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Download or read book Financial Frictions and Sources of Business Cycle written by Marzie Taheri Sanjani and published by International Monetary Fund. This book was released on 2014-10-23 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks.

Download or read book Money Theory and Practice written by Jin Cao and published by Springer Nature. This book was released on 2019-12-07 with total page 412 pages. Available in PDF, EPUB and Kindle. Book excerpt: This textbook provides an introduction to modern monetary economics for advanced undergraduates, highlighting the lessons learned from the recent financial crisis. The book presents both the core New Keynesian model and recent advances, taking into account financial frictions, and discusses recent research on an intuitive level based on simple static and two-period models, but also prepares readers for an extension to a truly dynamic analysis. Further, it offers a systematic perspective on monetary policy, covering a wide range of models to help readers gain a better understanding of controversial issues. Part I examines the long-run perspective, addressing classical monetary policy issues such as determination of the price level and interaction between monetary and fiscal policy. Part II introduces the core New Keynesian model, characterizing optimal monetary policy to stabilize short-term shocks. It discusses rules vs. discretion and the challenges arising from control errors, imperfect information and robustness issues. It also analyzes optimal control in the presence of an effective lower bound. Part III focuses on modelling financial frictions. It identifies the transmission mechanisms of monetary policy via banking and introduces models with incomplete markets, principal-agent problems, maturity mismatch and leverage cycles, to show why investors’ and intermediaries’ own stakes play a key role in lending with pro-cyclical features. In addition, it presents a tractable model for handling liquidity management and demonstrates that the need to sell assets in crisis amplifies the volatility of the real economy. Lastly, the book discusses the relation between monetary policy and financial stability, addressing systemic risk and the role of macro-prudential regulation.

Download or read book Environmental and Energy Policy and the Economy written by Matthew J. Kotchen and published by University of Chicago Press. This book was released on 2022-01-24 with total page 275 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume presents six new papers on environmental and energy economics and policy in the United States. Rebecca Davis, J. Scott Holladay, and Charles Sims analyze recent trends in and forecasts of coal-fired power plant retirements with and without new climate policy. Severin Borenstein and James Bushnell examine the efficiency of pricing for electricity, natural gas, and gasoline. James Archsmith, Erich Muehlegger, and David Rapson provide a prospective analysis of future pathways for electric vehicle adoption. Kenneth Gillingham considers the consequences of such pathways for the design of fuel vehicle economy standards. Frank Wolak investigates the long-term resource adequacy in wholesale electricity markets with significant intermittent renewables. Finally, Barbara Annicchiarico, Stefano Carattini, Carolyn Fischer, and Garth Heutel review the state of research on the interactions between business cycles and environmental policy.

Download or read book Monetary Policy Inflation and the Business Cycle written by Jordi Galí and published by Princeton University Press. This book was released on 2015-06-09 with total page 295 pages. Available in PDF, EPUB and Kindle. Book excerpt: The classic introduction to the New Keynesian economic model This revised second edition of Monetary Policy, Inflation, and the Business Cycle provides a rigorous graduate-level introduction to the New Keynesian framework and its applications to monetary policy. The New Keynesian framework is the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. A backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, the framework provides the theoretical underpinnings for the price stability–oriented strategies adopted by most central banks in the industrialized world. Using a canonical version of the New Keynesian model as a reference, Jordi Galí explores various issues pertaining to monetary policy's design, including optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the effects on monetary policy are addressed, with emphasis on the desirability of inflation-targeting policies. New material includes the zero lower bound on nominal interest rates and an analysis of unemployment’s significance for monetary policy. The most up-to-date introduction to the New Keynesian framework available A single benchmark model used throughout New materials and exercises included An ideal resource for graduate students, researchers, and market analysts

Download or read book International Dimensions of Monetary Policy written by Jordi Galí and published by University of Chicago Press. This book was released on 2010-03-15 with total page 663 pages. Available in PDF, EPUB and Kindle. Book excerpt: United States monetary policy has traditionally been modeled under the assumption that the domestic economy is immune to international factors and exogenous shocks. Such an assumption is increasingly unrealistic in the age of integrated capital markets, tightened links between national economies, and reduced trading costs. International Dimensions of Monetary Policy brings together fresh research to address the repercussions of the continuing evolution toward globalization for the conduct of monetary policy. In this comprehensive book, the authors examine the real and potential effects of increased openness and exposure to international economic dynamics from a variety of perspectives. Their findings reveal that central banks continue to influence decisively domestic economic outcomes—even inflation—suggesting that international factors may have a limited role in national performance. International Dimensions of Monetary Policy will lead the way in analyzing monetary policy measures in complex economies.

Download or read book Interbank Frictions Business Cycle Fluctuations and Monetary Policy Trade offs written by Yujung Suh and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The Great Recession and consequent slow overall economic recovery have reignited research interests in financial factors in business cycle fluctuations and monetary policy rules. In the recent financial crisis, highly interconnected and leveraged financial institutions through wholesale financial markets have been blamed as the main culprit in exacerbating the initial shock in the financial market. The role of market-based financial institutions in the supply of credit has been expanded in the United States especially before the Great Recession. The market-based institutions have used securitization as one of their important tools to raise funds. Market-based lending and the related securitization process are a part of the shadow banking system, which is broadly defined as ''credit intermediation involving entities and activities (fully or partially) outside the regular banking system'' by the Financial Stability Board. My dissertation investigates the importance of financial factors in the business cycle fluctuations and monetary policy rules. The first chapter explores the role of interbank friction shocks in accounting for the business cycle fluctuations. I augment financial intermediation of Gertler and Kiyotaki (2011) with an otherwise standard New Keynesian DSGE model with nominal rigidities in wages and prices. I then fit the model to US data, using two new financial variables (interbank loans and the net worth of banks) in the literature and allowing the interbank frictions to vary over time following exogenous shocks to these frictions. According to the Bayesian estimation of the model, shocks to interbank frictions are important factors in explaining the fluctuations of the economy, accounting for 7% of the output fluctuations, 11% of the investment fluctuations, 53% of the fluctuations in the premium and 8% of the fluctuations in interbank loans. Analyses of historical decompositions show that interbank frictions shock plays an important role in the movement of key macro variables early in the downturn of the recent financial crisis. In the second chapter, I evaluate the effect of financial frictions and shocks on monetary policy. The identification method of Justiniano, Primiceri and Tambalotti (2011) is adopted to tackle the criticism on the identification between labor supply shocks and wage markup shocks by Chari, Kehoe and McGrattan (2009). The model is re-estimated with more data series on nominal wage inflation and the output gap, defined as the difference between the actual output and potential out, is derived. The output gap is estimated to be large and displays low-frequency movements under Taylor-rule type monetary policy. Estimated shocks including interbank friction shocks then are fed into the model under Ramsey optimal monetary policy to evaluate the impact of financial shocks on the evolution of the economy and the counterfactual simulation on the evolution of the economy is conducted. The counterfactuals show that, unlike the volatile movements of output gap under Taylor-rule type monetary policy, the output gap is more stabilized and the trade-offs between conflicting policy objectives are moderate if monetary policy is conducted optimally. The last chapter explores the possibility of regime shifts in the financial frictions and the volatility of shocks to financial frictions. The preliminary estimation results on the regime-switching DSGE model show that the regime has switched between low friction and high friction regimes. At this sage, the results are mostly preliminary since the numerical optimization may stop at a local but not global maximum of the posterior distribution due to the possibility that the objective function is flat or multimodal with shifts in regimes. More through results will be obtained by gradient-free global optimization methods. The artificial bee colony (ABC) algorithm and the differential evolution algorithm are now employed to estimate the regime-switching DSGE model in the last chapter.

Download or read book International Capital Flows written by Martin Feldstein and published by University of Chicago Press. This book was released on 2007-12-01 with total page 500 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.

Download or read book Financial Dynamics and Business Cycles written by Willi Semmler and published by M.E. Sharpe. This book was released on 1991-06 with total page 288 pages. Available in PDF, EPUB and Kindle. Book excerpt: Providing an analysis of the Tibet question, this work explores essential themes and issues concerning modern Tibet. It considers such topics as representations and sovereignty, economic development and political conditions, the exile movement and human rights, historical legacies and international politics, identity issues and the local society.

Download or read book Uncertainty Financial Frictions and Nominal Rigidities A Quantitative Investigation written by Ambrogio Cesa-Bianchi and published by International Monetary Fund. This book was released on 2017-09-29 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time series properties of macro and micro uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, these account for a small (non-trivial) share of output volatility.

Download or read book Financial Frictions Monetary Policy and Business Cycles written by Longmei Zhang and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Money Theory and Practice written by Jin Cao and published by . This book was released on 2019 with total page 406 pages. Available in PDF, EPUB and Kindle. Book excerpt: This textbook provides an introduction to modern monetary economics for advanced undergraduates, highlighting the lessons learned from the recent financial crisis. The book presents both the core New Keynesian model and recent advances, taking into account financial frictions, and discusses recent research on an intuitive level based on simple static and two-period models, but also prepares readers for an extension to a truly dynamic analysis. Further, it offers a systematic perspective on monetary policy, covering a wide range of models to help readers gain a better understanding of controversial issues. Part I examines the long-run perspective, addressing classical monetary policy issues such as determination of the price level and interaction between monetary and fiscal policy. Part II introduces the core New Keynesian model, characterizing optimal monetary policy to stabilize short-term shocks. It discusses rules vs. discretion and the challenges arising from control errors, imperfect information and robustness issues. It also analyzes optimal control in the presence of an effective lower bound. Part III focuses on modelling financial frictions. It identifies the transmission mechanisms of monetary policy via banking and introduces models with incomplete markets, principal-agent problems, maturity mismatch and leverage cycles, to show why investors' and intermediaries' own stakes play a key role in lending with pro-cyclical features. In addition, it presents a tractable model for handling liquidity management and demonstrates that the need to sell assets in crisis amplifies the volatility of the real economy. Lastly, the book discusses the relation between monetary policy and financial stability, addressing systemic risk and the role of macro-prudential regulation.

Download or read book Monetary Policy Strategy written by Frederic S. Mishkin and published by MIT Press. This book was released on 2009-08-21 with total page 561 pages. Available in PDF, EPUB and Kindle. Book excerpt: A leading academic authority and policymaker discusses monetary policy strategy from the perspectives of both scholar and practitioner, offering theory, econometric evidence, and extensive case studies. This book by a leading authority on monetary policy offers a unique view of the subject from the perspectives of both scholar and practitioner. Frederic Mishkin is not only an academic expert in the field but also a high-level policymaker. He is especially well positioned to discuss the changes in the conduct of monetary policy in recent years, in particular the turn to inflation targeting. Monetary Policy Strategy describes his work over the last ten years, offering published papers, new introductory material, and a summing up, “Everything You Wanted to Know about Monetary Policy Strategy, But Were Afraid to Ask,” which reflects on what we have learned about monetary policy over the last thirty years. Mishkin blends theory, econometric evidence, and extensive case studies of monetary policy in advanced and emerging market and transition economies. Throughout, his focus is on these key areas: the importance of price stability and a nominal anchor; fiscal and financial preconditions for achieving price stability; central bank independence as an additional precondition; central bank accountability; the rationale for inflation targeting; the optimal inflation target; central bank transparency and communication; and the role of asset prices in monetary policy.

Download or read book Essays on Credit Frictions Debt Choice and the Business Cycle written by Julian Karl Douglas Wright and published by . This book was released on 1995 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Monetary Policy Mistakes and the Evolution of Inflation Expectations written by Athanasios Orphanides and published by DIANE Publishing. This book was released on 2010 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? The authors use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. The authors document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. They show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Charts and tables.