When impulse responses in dynamic multivariate models such as identified VARs are given economic interpretations, it is important that reliable statistical inferences be provided. Before probability assessments are provided, however, the model must be normalized. Contrary to the conventional wisdom, this paper argues that normalization, a rule of reversing signs of coefficients in equations in ...

This paper proposes a simple prototype model that describes the complex dynamics of a sophisticated monetary economy. The interaction between the current and intertemporal financial constraints on economic units brings about irregular fluctuations at both micro and macro levels. We use qualitative dynamic analysis and numerical simulations to investigate the interaction between financial fragil...

The challenge for stabilization policy presented by the COVID-19 pandemic stems above all from disruption of circular flow payments, resulting in a failure what Keynes (1936) calls “effective demand.” As consequence, economic activity many sectors can be inefficiently low, and interest-rate cannot eliminate distortions—not because limit on extent to which interest rates reduced, but reductions ...

This paper revisits the classic discretion versus commitment debate when a policymaker issues signals and agents choose to ignore them or not. Besides responding with discretion to agents’ actions or committing to a plan ex ante, a policymaker can also choose an adaptation policy, where she commits after agents make learning decisions but before agents take actions. Two mechanisms are at work i...

Empirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in stabilising the incipient unit root in inflation. The mechanism by which it does this appears however to be complicated ...

Article history: Received 8 August 2011 Received in revised form 23 May 2012 Accepted 31 May 2012 Available online 13 June 2012 This paper shows that financial integration may reduce welfare in the presence of nominal price rigidity. From a policy perspective, the model implies that developing countries that are experiencing financial integration may attempt to alleviate the welfare cost of int...

The simulated results of this paper show that New Keynesian DSGE models with capital accumulation can generate substantial persistencies in the dynamics of the main economic variables, due to the stock nature of capital. Empirical estimates on U.S. data from 1960:I to 2008:I show the response of monetary policy to inflation was almost twice lower than traditionally considered, as capital accumu...

This paper argues that recently popular forecast-based instrument rules for monetary policy may fail to stabilize economic ‡uctuations. In a New Keynesian model of output gap and in‡ation determination in which private agents face multi-period decision problems, but have non-rational expectations and learn over time, if the monetary authority adopts a forecast-based instrument rule and responds...

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend a...

This paper examines the impact of public information in an economy where agents also have diverse private information. Since disclosures by central banks are an important source of public information, we are able to assess how the words of central bankers shape expectations, in addition to their actions. In an otherwise standard macro model, the disproportionate role of public information degra...