Volume 16, Issue 2

The short-term nominal interest rate can anchor private-sector expectations into low inflation – more precisely, into the best equilibrium reputation can sustain. I introduce nominal asset markets in an infinite horizon version of the Barro-Gordon model and characterize the subset of sustainable policies compatible with any given asset price system at date t =0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate at date t =0.

This paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model’s fit to the US data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

This paper studies the adjustment of production factors to the cycle taking into account factor utilization in multiple dimensions (labor working time, capital operating time and capital capacity utilization) and examines the impact of obstacles to increasing capital operating time on this adjustment path. Factor utilization adjusts the most rapidly, first through capital capacity utilization and capital operating time and then labor working time. The adjustment is slow for the number of employees and even slower for the capital stock. Obstacles to increasing capital operating time lead to a slower adjustment of capital operating time, offset by a stronger adjustment of capacity utilization.

This paper reconsiders the effects of fiscal policy on long-term interest rates employing a factor augmented panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989–2013. We find that two global factors – the global monetary and fiscal policy stances – explain more than 60 percent of the variance in the long-term interest rates. Under our frame work, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.

This paper examines the effects of expanding public health insurance benefits on individuals’ welfare in a highly old-age dependent economy. On the one hand, such a policy would benefit the older generations in the population by improving their health status. On the other hand, an economy that has a high share of the elderly may sharply increase the tax rate that finances the public health insurance program, which is mainly financed by working-age generations. Due to the trade-off, the impact of the policy on average welfare is ambiguous. To quantify this effect, I examine the South Korean plan to expand its public health insurance despite the country’s rapidly aging population. I build an overlapping-generations model and track the effect of the proposed public health insurance expansion on welfare over a transition path. The results suggest that the proposed expansion not only increases average welfare, but also the welfare of the working-age generations who would be more likely to resort to preventative medicine. However, such welfare gains can be lost if implementation of the policy were to be postponed to a later highly old-age dependent economy.

We characterize the behavior of disaggregate manufacturing sectors for a large set of developed and emerging markets around recession dates. We uncover some relevant stylized facts. The dispersion in value added (VA) growth rates in developed economies is counter-cyclical, whereas for emerging countries it is pro-cyclical. Recoveries are more productivity-driven in developed countries as opposed to employment-driven for emerging markets. Around recession episodes sectoral-level misallocation of resources does not significantly change in developed economies, whereas it increases in emerging economies during financial crises. Therefore, there is no evidence that recessions improve the allocation of resources across industries.

The share of non-regular employment has been increasing in many developed countries during the past two decades. The objective of this paper is to study a cause of the upward trend in non-regular employment by focusing on productivity growth. Data from Japan shows that the slowdown in productivity growth increases both unemployment and the proportion of non-regular workers to total employed workers. In order to study the impact of long-run productivity growth on unemployment and non-regular employment, I develop a search and matching model with disembodied technological progress and two types of jobs, regular and non-regular jobs. The numerical analysis demonstrates that the slowdown in productivity growth increases the share of non-regular employment and the unemployment rate, which is consistent with empirical facts.

I model knowledge (patent) licensing and evaluate intellectual property regulation in an endogenous growth framework where the engine of growth is in-house R&D performed by high-tech firms. I show that high-tech firms innovate more and economic growth is higher when there is knowledge licensing, and when intellectual property regulation facilitates excludability of knowledge, than when knowledge is not excludable and there are knowledge spillovers among high-tech firms. However, the number of high-tech firms is lower, and welfare is not necessarily higher when there is knowledge licensing than when there are knowledge spillovers.

We consider the textbook neo-Keynesian model with staggered prices and wages in discrete time. We prove analytically that the Taylor principle holds in this case. When both contracts exhibit sluggish adjustment to market conditions, the policy maker faces a trade-off between stabilizing three welfare relevant variables: output, price inflation and wage inflation. We consider a monetary policy rule designed accordingly: the central banker can react to both inflations and the output gap. In addition to generalizing the Taylor principle we show that the frontier of determinacy embeds the frontier derived with staggered prices only, generalizes the frontier of determinacy in the limit case of continuous time and is symmetric in price and wage inflations.

We propose a method to assess the efficiency of macroeconomic outcomes using the restrictions implied by optimal policy DSGE models for the volatility of observable variables. The method exploits the variation in the model parameters, rather than random deviations from the optimal policy. In the new Keynesian business cycle model this approach shows that optimal monetary policy imposes tighter restrictions on the behavior of the economy than is readily apparent. The method suggests that for the historical output, inflation and interest rate volatility in the United States over the 1984–2005 period to be generated by any optimal monetary policy with a high probability, the observed interest rate time series should have a 25% larger variance than in the data.