Monetary Policy with Market Frictions: Theory and Evidence

点击翻译按钮获取中文摘要

Monetary policy analysis requires the construction of models of macroeconomic activity. Such models need to be realistic, capturing the main features of business cycles. They need to highlight the main channels by which monetary policy affects the economy. Finally, the models need to be used to uncover the main trade-offs facing moentary policy-makers. This project develops detailed macroeconomic models that feature various frictions including imperfect competition, sticky prices and costs of adjusting portfolios. This research consists of theoretical and empirical analysis in the following three areas: Price dynamics and macroeconomic activity; Design of monetary policy rules, and Construction and evaluation of small-scale macroeconomic models.Price dynamics and macroeconomic activity: One part of the proposed research explores empirical implications of state dependent pricing, drawing on recently completed theoretical work by the principal investigator. The theory makes predictions about the form of coefficient instability in standard time dependent pricing models-these predictions can be tested on aggregate data. Another part of this research concerns the dynamics of disinflation experiences. The new research investigates the role of credibility in disinflation using measures of long-term expected inflation extracted from interest rates.Design of monetary policy rules: In fully articulated macroeconomic models, monetary policy rules can be designed to maximize welfare. Previous work by the principal investigator explored optimal policy with imperfect competition and sticky prices; the new research further develops the methodology and applies it to more realistic macroeconomic models. However, there can be multiple equilibria in macroeconomic models if monetary policy is implemented with an interest rate rule. Previous work has found restrictions on interest rate rules which lead to unique equilibria in models without investment and capital. For example, uniqueness requires that rate responses to inflation (either expected or actual) must be very aggressive. The new research investigates the limits on interest rate rules in more realistic economies. The goal is to determine whether unique equilibria obtain for a wider range of parameters within this new class of models. Construction and evaluation of small-scale macroeconomic models: Recent work has also stressed that financial market frictions can lead to liquidity effects of monetary policy on interest rates, but only in models that display very rapid adjustments of the price level. The new research therefore combines financial market frictions with monopolistic competition and sticky prices, a synthesis which promises to overcome key difficulties with each approach. Empirical implications of this model are studied under money stock and interest rate rules, using an econometric approach previously developed by the principal investigator.