Unconventional Policy Instruments in the New Keynesian Model
Unconventional Policy Instruments in the New Keynesian Model

Author: Zineddine Alla

Publisher: International Monetary Fund

Published: 2016-03-10

Total Pages: 34

ISBN-13: 1513573039

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This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the ‘divine coincidence’ breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker’s preferences when both instruments are available. We show that the use of an unconventional instrument can help reduce the zone of equilibrium indeterminacy and the volatility of the economy. However, in some circumstances, committing not to use the second instrument may be welfare improving (a result akin to Rogoff (1985a) example of counterproductive coordination). We further show that the optimal central banker should be both aggressive against inflation, and interventionist in using the unconventional policy instrument. As long as price setting depends on expectations about the future, there are gains from establishing credibility by using any instrument that affects these expectations.

Unconventional Policy Instruments in the New Keynesian Model
Unconventional Policy Instruments in the New Keynesian Model

Author: Zineddine Alla

Publisher:

Published: 2016

Total Pages: 34

ISBN-13: 9781513573236

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This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the 'divine coincidence' breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker's preferences when both instruments are available. We show that the use of an unconventional instrument can help reduce the zone of equilibrium indeterminacy and the volatility of the economy. However, in some circumstances, committing not to use the second instrument may be welfare improving (a result akin to Rogoff (1985a) example of counterproductive coordination). We further show that the optimal central banker should be both aggressive against inflation, and interventionist in using the unconventional policy instrument. As long as price setting depends on expectations about the future, there are gains from establishing credibility by using any instrument that affects these expectations.--Abstract.

The Four Equation New Keynesian Model
The Four Equation New Keynesian Model

Author: Eric R. Sims

Publisher:

Published: 2019

Total Pages: 41

ISBN-13:

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This paper develops a New Keynesian model featuring financial intermediation, short and long term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four key equations - a Phillips curve, an IS equation, and policy rules for the short term nominal interest rate and the central bank's long bond portfolio (QE). The four equation model collapses to the standard three equation New Keynesian model under a simple parameter restriction. Credit shocks and QE appear in both the IS and Phillips curves. Optimal monetary policy entails adjusting the short term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. The ability of the central bank to engage in QE significantly mitigates the costs of a binding zero lower bound.

Resurrecting the New-Keynesian Model
Resurrecting the New-Keynesian Model

Author: Olaf Posch

Publisher:

Published: 2018

Total Pages: 79

ISBN-13:

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This paper explores the ability of the New-Keynesian (NK) model to explain the recent periods of quiet and stable inflation at near-zero nominal interest rates. We show how (conventional and unconventional) monetary policy shocks enlarge the ability to explain the facts, such that the theory supports both a negative and a positive response of inflation. Central to our finding is that monetary policy shocks may have temporary and/or permanent components. We find that the NK model can explain the recent episodes, even if one considers an active role of monetary policy and restrict ourselves to the regions of (local) determinacy. We also show that a new global solution, capturing highly nonlinear dynamics, is necessary to generate a prolonged period of near-zero interest rates as a policy choice.

New Keynesian Models
New Keynesian Models

Author: V. V. Chari

Publisher:

Published: 2008

Total Pages: 56

ISBN-13:

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Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.

The Four Equation Ney Keynesian Model
The Four Equation Ney Keynesian Model

Author: Eric R. Sims

Publisher:

Published: 2019

Total Pages: 41

ISBN-13:

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This paper develops a New Keynesian model featuring financial intermediation, short and long term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four key equations – a Phillips curve, an IS equation, and policy rules for the short term nominal interest rate and the central bank's long bond portfolio (QE). The four equation model collapses to the standard three equation New Keynesian model under a simple parameter restriction. Credit shocks and QE appear in both the IS and Phillips curves. Optimal monetary policy entails adjusting the short term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. The ability of the central bank to engage in QE significantly mitigates the costs of a binding zero lower bound.

Robust Monetary Policy in the New-Keynesian Framework
Robust Monetary Policy in the New-Keynesian Framework

Author: Kai Leitemo

Publisher:

Published: 2007

Total Pages: 26

ISBN-13:

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We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under a non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy).

New-Keynesian Models and Monetary Policy
New-Keynesian Models and Monetary Policy

Author: Ulf Söderström

Publisher:

Published: 2006

Total Pages: 0

ISBN-13:

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Using an empirical New-Keynesian model with optimal discretionary monetary policy, we estimate key parameters - the central bank's preference parameters; the degree of forward-looking behavior in the determination of inflation and output; and the variances of inflation and output shocks - to match some broad characteristics of U.S. data. The parameterization we obtain implies a small concern for output stability but a large preference for interest rate smoothing, and a small degree of forward-looking behavior in price-setting but a large degree of forward-looking in the determination of output. Our methodology also allows us to carefully examine the consequences of alternative parameterizations and to provide intuition for our results.