The paper analyzes two questions: (i) the effect of monetary policy shock on business cycle and (ii) the extent to which a shift in a monetary policy affects the dynamics of business cycle. Unlike previous literature, to answer the questions, we measure the cycle movements by calculating an index from a number of aggregate macroeconomic series via a dynamic factor model. We find that monetary p...

Following the damaging real effects of asset price fluctuations over the recent financial crisis, the debate on the appropriate role of such prices in a monetary policy context has gained renewed attention. This paper argues that a direct monetary policy response to asset prices is not desirable under common instrumental rate rules. To illustrate this point, we build an adaptive learning model,...

This paper provides recursive methods for analyzing the credible equilibria of an incomplete information monetary policy game. The policy game is one in which a discretionary government has a short run temptation to engage in a surprise monetary expansion. It also has the opportunity to mimic a government that is committed to the optimal ex ante monetary policy actions. We derive an algorithm f...

In a passive monetary and active fiscal policy regime, changes in the value of public debt generate wealth effects on households. Then, in contrast to the active monetary and passive fiscal policy regime, inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks. Moreover, a higher level of public de...

This paper studies the impact of geographic banking deregulation on the effectiveness of monetary policy. State-level removal of restrictions on interstate banking strengthened the effect of monetary policy on bank lending. This effect was driven by small banks affiliated with bank holding companies. Following interstate deregulation affiliated banks reallocate assets towards securities and awa...

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best. Indeed, several influential economists suggest that money is irrelevant for monetary policy: Central banks effect economic activity and inflation by a) controlling a very shortterm nominal interest rate and b) by i...

The main objective of monetary policy1 is to protect the value of the currency. This task is complicated by the long and variable lags between changes in the monetary policy stance and its ultimate effect on inflation. The delay between changes in monetary policy and their full effect on inflation could be as long as two and a half years. This means that monetary policy decisions have to be for...

Structural VAR models have been widely used to model monetary policy dynamics. Typically, a choice is made between regime-switching models and time-varying parameter models. In this paper we use a canonical model of monetary policy and estimate both types of time variation in monetary policy while also allowing for changing variances. The models are compared using marginal likelihood and foreca...

Recent research in monetary economics has followed the advice of McCallum (1988) and investigated the robustness properties of monetary policy rules by evaluating them in a variety of models. Evaluation across models is typically based on an exogenously specified loss function. However, the theory on which many recent monetary policy models are based implies that changes in the structure of the...

At the end of 1999, the Swiss National Bank modified its monetary policy concept and abandoned monetary targeting in favor of an approach based on an inflation forecast. Although central bank money or the monetary base, the SNB's intermediate target variable, was plagued by instabilities, the switch to a new policy framework was motivated by more fundamental problems arising from monetary targe...