Estimation and control of an optimization-based model with sticky prices and wages

Amato, Jeffery D.; Laubach, Thomas

doi:10.1016/s0165-1889(02)00021-0

Cited by 110 publications

(114 citation statements)

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“…As in the analysis of Amato and Laubach (2001a), habit persistence implies that the period loss function should depend on the lagged output gap as well as the present gap. However, we note that both the inflationary pressures indicated in (1.47) and the deadweight losses measured by (1.50) depend on the quasi-differenced output gap x t − δx t−1 , where δ is the smaller root of (1.48).…”

Section: Habit Persistencementioning

confidence: 98%

“…28 Hence we assume habit persistence in the level of aggregate private expenditure, and not solely in consumption, as in the models of Amato and Laubach (2001a) and Boivin and Giannoni (2003). This might seem odd, given that we do not really interpret the "C t " in our model as referring mainly to consumption expenditure.…”

Section: Habit Persistencementioning

confidence: 98%

“…A number of studies have found that the joint dynamics of real and nominal variables are best explained by a model in which wages as well as prices are sticky (e.g., Amato and Laubach, 2001b;Christiano et al, 2001;Smets and Wouters, 2002;Altig et al, 2002;and Woodford, 2003, chap. 3).…”

Section: Wages and Prices Both Stickymentioning

confidence: 99%

“…As in Rotemberg and Woodford (1997), and Amato and Laubach (2001b), we begin the sample in the first quarter of 1980 because several empirical studies have identified a significant change in monetary policy around that period (see, e.g., Clarida, Galí and Gertler, 2000;Boivin, 2001;Boivin and Giannoni, 2003;Cogley andSargent, 2001, 2002). 34…”

Section: The Effects Of Monetary Disturbancesmentioning

confidence: 99%

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Optimal Inflation Targeting Rules

Giannoni¹,

Woodford²

2003

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This paper characterizes optimal monetary policy for a range of alternative economic models in terms of a flexible inflation targeting rule, with a target criterion that depends on the model specification. It shows which forecast horizons should matter, and which variables besides inflation should be taken into account, for each specification.The likely quantitative significance of the various factors considered in the general discussion is then assessed by estimating a small, structural model of the U.S. monetary transmission mechanism with explicit optimizing foundations. An optimal policy rule is computed for the estimated model, and shown to correspond to a multi-stage inflation-forecast targeting procedure.The degree to which actual U.S. policy over the past two decades has conformed to the optimal target criteria is then considered. committed to adjust short-term nominal interest rates periodically so as to ensure that its projection for the economy's evolution satisfies an explicit target criterion -for example, in the case of the Bank of England, the requirement that the RPIX inflation rate be projected to equal 2.5 percent at a horizon two years in the future (Vickers, 1998). Such a commitment can overcome the inflationary bias that is likely to follow from discretionary policy guided solely by a concern for social welfare, and can also help to stabilize medium-term inflation expectations around a level that reduces the output cost to the economy of maintaining low inflation.Another benefit that is claimed for such an approach (e.g., King, 1997; Bernanke et al., 1999)-and an important advantage, at least in principle, of inflation targeting over other policy rules, such as a k-percent rule for monetary growth, that should also achieve a low average rate of inflation -is the possibility of combining reasonable stability of the inflation rate (especially over the medium to long term) with optimal short-run responses to real disturbances of various sorts. Hence Svensson (1999) argues for the desirability of "flexible" inflation targeting, by which it is meant 1 that the target criterion involves not only the projected path of the inflation rate, but one or more other variables, such as a measure of the output gap, as well.We here consider the question of what sort of additional variables ought to matterand with what weights, and what dynamic structure -in a target criterion that is intended to implement optimal policy. We wish to use economic theory to address questions such as which measure of inflation is most appropriately targeted (an index of goods prices only, or wage inflation as well?), which sort of output gap, if any, should justify short-run departures of projected inflation from the long-run target rate (a departure of real GDP from a smooth 1 Svensson discusses two alternative specifications of an inflation-targeting policy rule, one of which (a "general targeting rule") involves specification of a loss function that the central bank should use to evaluate alternative paths for the e...

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Section: Habit Persistencementioning

confidence: 98%

Section: Habit Persistencementioning

confidence: 98%

Section: Wages and Prices Both Stickymentioning

confidence: 99%

Section: The Effects Of Monetary Disturbancesmentioning

confidence: 99%

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Optimal Inflation Targeting Rules

Giannoni¹,

Woodford²

2003

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“…The NNCS can best be understood with reference to a simple benchmark model for the analysis of monetary policy 1 . Firstly, there is an equation relating the output gap, b y t , to the future deviation of actual from potential output and negatively to the real interest rate,…”

Section: Introductionmentioning

confidence: 99%

Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe

Leith

Malley

2005

European Economic Review

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ESTIMATED GENERAL EQUILIBRIUM MODELS FOR THE EVALUATION OF MONETARY POLICY IN THE US AND EUROPE AbstractA persistent criticism of general equilibrium models of monetary policy which incorporate nominal inertia in the form of the New Keynesian Phillips Curve (NKPC) is that they fail to capture the extent of inflation inertia in the data. In this paper we derive a general equilibrium model based on optimising behaviour, but which also implies a data consistent NKPC. Specifically our model accounts for nominal inertia in both price and wage setting as well for habits in consumption. Using US and European data from 1970 to 1998 our parameter estimates reveal that (i) there is relatively more inertia in pricesetting in Europe; (ii) wage contracts last longer in the US; (iii) the extent of backward-looking behaviour in price and wage setting is statistically significant but small in both the US and Europe; and (iv) significant habits effects are present in European consumption. Finally we simulate the effects of monetary policy and find that while the magnitude of the impact of monetary policy on the endogenous variables in our estimated models are similar to other econometric studies, the dynamic paths for variables display less inertia than is typically found in studies which use output gaps to proxy changes in marginal costs.JEL Classification: E10, E3, E52.

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Welfare‐maximizing monetary policy under parameter uncertainty

Edge

Laubach

Williams

2010

J of Applied Econometrics

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This paper examines welfare‐maximizing monetary policy in an estimated micro‐founded general equilibrium model of the US economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model's dynamics, utility‐based welfare criterion and the ‘natural’ rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first‐best. Copyright © 2009 John Wiley & Sons, Ltd.

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Estimation and control of an optimization-based model with sticky prices and wages

Cited by 110 publications

References 20 publications

Optimal Inflation Targeting Rules

Optimal Inflation Targeting Rules

Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe

Welfare‐maximizing monetary policy under parameter uncertainty

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