In the nineteenseventies, James Tobin suggested the introduction of a transaction tax on the currency market to cope with exchange rate volatility. We investigate the consequences of the introduction of such a tax on an asset market model from a game-theoretic and an experimental point of view. Our main results include in respect to our model that contrary to the situation in game-theoretic equ...

The present paper incorporates a mechanism of rules-based central-bank interventions into a Dornbusch-type framework. We show that the implied reactions of exchange rates and interest rate differentials in response to a monetary shock depend crucially on the particular monetary policy feedback rule. The Dornbusch case of positively correlated and overshooting nominal and real exchange rates as ...

Existing estimates of the Federal Reserve’s implicit inflation target typically rely on the assumption that it is constant for the duration of the period of analysis. This paper relaxes this assumption and estimates the implicit inflation target using a time-varying parameter model and the Kalman filter. In applying this method to the Volcker–Greenspan period, it finds significant time variatio...

We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either pricelevel or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted ...

In this paper, a simple search model of the labor market is combined with a cash-in-advance model of a monetary economy. Changes in the nominal rate of interest alter the job destruction margin, and persistent rate changes generate hump shaped responses of employment and income similar to those observed in the data. The model is used to study optimal monetary policy under both commitment and di...

I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents’ incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second-best solution is not distortionary. ...

Previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements, and on the incentives for participants to alter the risk of the portfolio under net settlement. By modeling the trading economy that generates the demand for payment services, we are able to show some largely unexplored advantages of net settlemen...

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 uses the European Commission’s Consumer Survey to assess whether inflation expectations have converged and whether inflation uncertainty has diminished following the introduction of the Euro in Europe. Consumers’ responses to the survey suggest that inflation expectations depend more on past national inflation rates than on the ECB’s anchor for price stability. The convergence in inf...

This paper investigates the dynamic effects of monetary and fiscal policy in a monetary union, which is characterized by asymmetric interest rate transmission. This asymmetry gives rise to intertemporal reversals in the relative effectiveness of policy on member country outputs. The direction and the number of these reversals depend on whether policies are unanticipated or anticipated. We also ...