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Monetary Policy Implications

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 111-A
Hosted By: American Economic Association
  • Chair: Scott Dressler, Villanova University

A Portfolio Model of Quantitative Easing

Signe Krogstrup
,
International Monetary Fund
Jens Christensen
,
Federal Reserve Bank of San Francisco

Abstract

This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, commonly known as quantitative easing (QE). Two financial frictions—segmentation of the market for central bank reserves and imperfect asset substitutability—give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.

Monetary Policy and Asset Price Bubbles

Paul Hubert
,
Sciences Po and OFCE
Christophe Blot
,
Sciences Po and OFCE
Fabien Labondance
,
University of Franche-Comté, CRESE and OFCE

Abstract

This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate bubble indicators for the stock and housing markets in the United States (US), based on different approaches proposed in the literature. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles whereas expansionary policies do fuel stock market bubbles. This result is confirmed on Euro area data. In addition, we find that US expansionary interest rate policies would inflate stock price bubbles while expansionary balance-sheet measures would lessen the bubble component of asset prices.

Monetary Policy Implications of State-dependent Prices and Wages

James Costain
,
Bank of Spain
Anton Nakov
,
European Central Bank and CEPR
Borja Petit
,
CEMFI

Abstract

This paper studies the dynamic general equilibrium effects of monetary policy shocks in a “control cost” model of state-dependent retail price adjustment and state-dependent wage adjustment. Both suppliers of retail goods and suppliers of labor are monopolistic competitors subject to idiosyncratic productivity shocks and nominal rigidities. Nominal rigidity arises because precise choice is costly: decision-makers tolerate errors both in the timing of price and wage adjustments, and in the new level at which the price or wage is set, because achieving perfect precision in these decisions would be excessively costly. The model is calibrated to data on the size and frequency of price and wage adjustments. We find that sticky wages by themselves account for much of the nonneutrality that occurs in the model where both sticky wages and sticky prices are present. Hence, a model in which both prices and wages are sticky implies substantially larger real effects of monetary shocks than does a model with sticky prices only.

Monetary Policy Under Behavioral Expectations: Theory and Experiment

Cars Hommes
,
University of Amsterdam and Tinbergen Institute
Domenico Massaro
,
Catholic University of Milan
Matthias Weber
,
Bank of Lithuania and Vilnius University

Abstract

Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposite theoretical predictions in a learning to forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit