Optimal long-run inflation with occasionally binding financial constraints

Abo-Zaid, Salem

doi:10.1016/j.euroecorev.2015.01.004

Cited by 15 publications

(2 citation statements)

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“…There are two common approaches to this method: first, to add the penalty term to the policymaker's welfare criterion (see Woodford, 2003), Giannoni and Woodford (2003), Levine et al (2008bLevine et al ( , 2012, Giannoni (2014)); second, to add the penalty term to the agents' welfare criteria in the model (see Den Haan and Wind (2012), Abo-Zaid (2015), Karmakar (2016)). The general idea is that instead of truncating the state space of the model at the constraint, we introduce a welfare penalty if the constraint is violated; this penalty acts as a constraint while maintaining differentiability of the policy functions.…”

Section: The Zlb Constraint Through a Penalty Functionmentioning

confidence: 99%

Simple mandates, monetary rules, and trend-inflation

2023

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A mandate framework is proposed for delegating monetary policy to an instrument-independent, but goal-dependent central bank that emphasizes simplicity in both the objectives entering the welfare criterion and those in the instrument rule. It consists of: (i) a simple quadratic loss function penalizing deviations from target variables; (ii) a welfare-optimized, Taylor-type log-linear nominal interest-rate rule with targets that match those in the loss function; (iii) a zero-lower-bound (ZLB) constraint on the nominal interest rate imposing a low unconditional probability of ZLB episodes; and (iv) a long-run inflation target. In an estimated New Keynesian model with these features, we find that for a quarterly probability of 5%, an optimal annual inflation target is close to 2%, weights for real variables in the loss function are small compared with inflation except for the real wage growth mandate and the optimized rules mimic a price-level rule.

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Section: The Zlb Constraint Through a Penalty Functionmentioning

confidence: 99%

Simple mandates, monetary rules, and trend-inflation

2023

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“…A negative shock to asset liquidity or firms' collateral constraint can cause aggregate investment, employment and consumption to collapse with output (Shi, ). In addition, Abo‐Zaid () concludes, using U.S. data in a New Keynesian model with collateral constraint, that long‐run inflation is around 1.5% when the economy faces a total factor productivity (TFP) shock and about 2.5% when the economy is hit by mark‐up shocks.…”

Section: Interlink Between Monetary and Macroprudential Policiesmentioning

confidence: 99%

What Can We Learn From the Implementation of Monetary and Macroprudential Policies: A Systematic Literature Review

Lubis

Alexiou

Nellis

2019

Journal of Economic Surveys

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The emergence of macroprudential policies, implemented by central banks as a means of promoting financial stability, has raised many questions regarding the interaction between monetary and macroprudential policies. Given the limited number of studies available, this paper sheds light on this issue by providing a critical and systematic review of the literature. To this end, we divide the theoretical and empirical studies into two broad channels of borrowers – consisting of the cost of funds and the collateral constraint – and financial intermediaries – consisting of risk‐taking and payment systems. In spite of the existing ambiguity surrounding coordination issues between monetary and macroprudential policies, it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability. Hence, macroprudential policies are needed to supplement monetary. In addition, we find that the role of the exchange rate is critical in the implementation of monetary and macroprudential policies in emerging markets, while volatile capital flows pose another challenge. In so far as how the arrangement of monetary and macroprudential policies varies across countries, key theoretical and policy implications have been identified.

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Taxation, credit frictions and the cyclical behavior of the labor wedge

Abo-Zaid

2020

Empir Econ

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Labor-income and consumption taxes are often referred to as the primary causes of the labor wedge and differences in hours worked across countries. While this can be potentially true in the long-run, its premise for explaining the cyclical behavior of the labor wedge is questionable. Using U.S. data over 1955-2019, this paper first studies whether taxation explains the cyclical behavior of the labor wedge. It is shown that the tax wedge, which combines both types of taxes, fails in accounting for the countercyclicality of the labor wedge. I then study other factors that may raise the labor wedge during recessions, such as credit frictions on the firms' side and price markups, and find that credit frictions are the primary reasons for this behavior. The empirical findings are consistent with the model-based results; the model with credit frictions successfully generates a countercyclical behavior of the labor wedge, whereas the model without credit frictions does not.

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Optimal long-run inflation with occasionally binding financial constraints

Cited by 15 publications

References 61 publications

Simple mandates, monetary rules, and trend-inflation

Simple mandates, monetary rules, and trend-inflation

What Can We Learn From the Implementation of Monetary and Macroprudential Policies: A Systematic Literature Review

Taxation, credit frictions and the cyclical behavior of the labor wedge

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