Papers by Nicoletta Batini
The most popular simple rules for the interest rate, due to Taylor (1993a) and Henderson and McKi... more The most popular simple rules for the interest rate, due to Taylor (1993a) and Henderson and McKibbin (1993), are both meant to inform monetary policy in economies that are closed. On the other hand, their main open economy alternatives, based on a Monetary Conditions Index (MCI) are potentially flawed for a number or reasons, not least because they fail to adequately allow for different types of exchange rate shocks when setting policy. In this paper we derive simple monetary policy rules that are suitable for small open economies in general, and for the UK in particular. We do so by comparing the performance of a battery of complex and simple rules, including the familiar Taylor and Henderson and McKibbin rules and MCI-based rules. This entails comparing the asymptotic properties of a two-sector open-economy dynamic stochastic general equilibrium model calibrated on UK data under different rules. We find that a good simple rule is one that responds to changes in the real exchange ...
In recent years UK real wages have been growing faster than labour factor productivity, implying ... more In recent years UK real wages have been growing faster than labour factor productivity, implying that the labour share has been rising. This paper looks at various definitions of the labour share and derives a measure for the UK, which appears positively correlated with the growth rate of the UK gross value added price deflator. Following Layard, Nickell and Jackman (1991), we investigate the relationship between inflation and the share more formally by estimating a pricing equation or "new Phillips curve" obtained from a structural dynamic model of price setting based on Rotemberg (1982) and extended to capture employment adjustment costs and the openness of the UK economy. This model nests the Sbordone (1998) and Gali, Gertler and Lopez-Salido (2000) relationship between inflation and marginal costs in the limiting case of a constant equilibrium markup and no employment adjustment costs. Our findings suggest that there is a stable ceteris paribus relationship between inflation and the labour share over the last 30 years in the UK and so the share contains information that helps to predict inflation.
We examine the performance of forward-looking in°ation-forecast-based rules in open economies. In... more We examine the performance of forward-looking in°ation-forecast-based rules in open economies. In a New Keynesian two-bloc model, a methodology ¯rst employed by Batini and Pearlman (2002) is used to obtain analytically the feedback parameters/horizon pairs associated with unique and stable equi-libria. Three key ¯ndings emerge: ¯rst, indeterminacy occurs for any value of the feedback parameter on in°ation if the forecast horizon lies too far into the future. Second, the problem of indeterminacy is intrinsically more serious in the open economy. Third, the problem is compounded further in the open economy when central banks respond to expected consumer, rather than pro-ducer price in°ation. JEL Classi¯cation: E52, E37, E58
In this paper we investigate the problem of selecting an optimal horizon for in#ation targeting i... more In this paper we investigate the problem of selecting an optimal horizon for in#ation targeting in the United Kingdom. Since there are two key ways of thinking about an optimal horizon, we look at optimal horizons for both of these interpretations. In addition, to see whether our results are robust in the face of model uncertainty, we compute optimal horizons for two di!erent models with divergent structural and dy-
This paper reviews the literature on the informal economy, focusing first on empirical findings a... more This paper reviews the literature on the informal economy, focusing first on empirical findings and then on existing approaches to modelling informality within both partial and general equilibrium environments. We concentrate on labour and credit markets, since these tend to be most affected by informality. The phenomenon is particularly important in emerging and other developing economies, given their high degrees of informal labour and financial services and the implications these have for the effectiveness of macroeconomic policy. We emphasize the need for dynamic general equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE) models for a full understanding of the costs, benefits and policy implications of informality. The survey shows that the literature on informality is quite patchy, and that there are several unexplored areas left for research.
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Kenny Turnbull for help with the production of this paper. Summary Four issues are considered. 1.... more Kenny Turnbull for help with the production of this paper. Summary Four issues are considered. 1. Has the MPC demonstrated a bias towards deflation? The answer is no. Over the period 1999(2) to 2001(1) inflation undershot the target and would still have undershot the target even if interest rates had been set point lower during the relevant decision period 1997(2) to 1999(1). But the MPC over this period could not reasonably have been expected to predict the rise in sterling and the modest wage growth which generated the undershoot. Over the more recent period 2001(2) to 2002(1), inflation again undershot the target but this time, had interest rates been set point lower during the relevant decision period, inflation would have overshot the target. More generally, the fact that MPC decisions are found to be only a fraction away from optimal with the benefit of 20/20 hindsight looks like something to celebrate. 2. Can we expect a surge in productivity growth because of the New Economy...
In this paper we investigate the problem of selecting an optimal horizon for in#ation targeting i... more In this paper we investigate the problem of selecting an optimal horizon for in#ation targeting in the United Kingdom. Since there are two key ways of thinking about an optimal horizon, we look at optimal horizons for both of these interpretations. In addition, to see whether our results are robust in the face of model uncertainty, we compute optimal horizons for two di!erent models with divergent structural and dynamic characteristics. 2001 Elsevier Science B.V. All rights reserved. JEL classixcation: E52; E37; E58
ingly popular monetary policy strategy, with some 21 countries (8 industrial and 13 emerging mark... more ingly popular monetary policy strategy, with some 21 countries (8 industrial and 13 emerging market) now inflation targeters. Other countries are considering following in their footsteps. Yet, while there have been numerous studies of inflation targeting in industrial countries, there has been little analysis of the effects of inflation targeting in emerging market countries. This chapter makes a first attempt to fill this void. It looks at the experience of the emerging market countries that have adopted inflation targeting since the late 1990s, focusing both on macroeconomic performance and the potential benefits and costs of adopting inflation targeting. A new and detailed survey of 31 central banks was conducted to support the analysis in the chapter. Particular attention is paid to the implications for institutional change and to the feasibility and success of inflation targeting when specific initial conditions, such as central bank independence, are initially absent.
We follow Fuhrer (2000) in estimating via Maximum Likelihood a log-linear consumption function on... more We follow Fuhrer (2000) in estimating via Maximum Likelihood a log-linear consumption function on UK data. In doing so we consider various habit formation assumptions. We show that a model of purely “external” habits as in Fuhrer (2000) fits the UK data remarkably well, and possibly in a superior way than US data where, according to our estimates, consumers’ habits look more “internal” in that they appear indexed to past average consumption of only a subset of (peer) consumers in the economy, rather than total past per capita consumption. We also find that for about one seventh of UK consumers, current consumption equals current income a strong violation of the permanent income hypothesis. Embedded in a sticky price-sticky inflation open-economy monetary model, the model that we estimate helps mimic the hump-shaped response of the output gap to income and interest rate shocks observed in the UK. Estimates of output Euler equations for the UK using a similar method agree with our gen...
While there have been numerous studies of inflation targeting in industrial countries, there has ... more While there have been numerous studies of inflation targeting in industrial countries, there has been much less analysis of the effects of inflation targeting in emerging market countries. Based on a new and detailed survey of 31 central banks, this paper shows that inflation targeting in emerging-market countries brings significant benefits to the countries that adopt it relative to other strategies, such as money or exchange rate targeting. Indeed, by comparing the performance of the inflation-targeting countries with a sample of countries that pursue other regimes we show that there are significant improvements in anchoring both inflation and inflation expectations with no adverse effects on output. In addition, under inflation targeting interest rates, exchange rates, and international reserves are less volatile, and the risk of currency crises relative to money or exchange rate targets is smaller. Interestingly, IT seems to outperform exchange rate pegs—even when only successfu...
Fiscal multipliers are important tools for macroeconomic projections and policy design. In many c... more Fiscal multipliers are important tools for macroeconomic projections and policy design. In many countries, little is known about the size of multipliers, as data availability limits the scope for empirical research. For these countries, we propose a simple method—dubbed the “bucket approach”—to come up with reasonable multiplier estimates. The approach bunches countries into groups (or “buckets”) with similar multiplier values, based on their characteristics. It also takes into account the effect of some temporary factors, such as the state of the business cycle. JEL Classification Numbers: E32, E62, H5
The debate about a country’s appropriate level of public debt in the medium run continues to rage... more The debate about a country’s appropriate level of public debt in the medium run continues to rage, and it remains unclear whether high debt is a cause or a consequence of low economic growth. By combining the financial accelerator literature with that on sovereign risk premia and fiscal limits, we build a model with borrowing constraints that produces leverage cycles, and embeds links between private and public debt dynamics. The model is calibrated on average euro area data and tracks well recent leverage dynamics. Four key results emerge. First, high private debt—rather than high public debt—is a more serious source of macro-fiscal vulnerability, because it leads to bigger contractions and deflations in response to adverse shocks. Second, when fiscal buffers are available, the government should always intervene to relax borrowing constraints of the private sector, and mitigate the consequences of deleveraging. Third, during deleveraging, first best monetary and fiscal stances shou...
We build a small open-economy model with partial financial dollarization--households hold wealth ... more We build a small open-economy model with partial financial dollarization--households hold wealth in domestic currency and a foreign currency; firms also have a balance sheet mismatch as in Gertler, Gilchrist and Natalucci (2001). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response and assess the optimal degree of exchange rate stabilization in this set up, drawing policy implications for countries that target inflation in economies of this kind
SSRN Electronic Journal
In this paper we ask whether countries can influence their exposure to changes in global financia... more In this paper we ask whether countries can influence their exposure to changes in global financial conditions. Specifically, we show that even though we can model cross-country capital flows via a global factor that closely tracks changes in global financial conditions, there is a large degree of heterogeneity in the sensitivity of each country to this same global factor. We then evaluate whether this cross-country heterogeneity can be attributed to different policy choices, including measures of capital flow management, such as capital controls and macroprudential policies. In our main results, we show that higher levels of capital controls and macroprudential policies both dampen the sensitivity to the global factor. Furthermore, we show that countries’ monetary and exchange rate policies can also be successfully deployed. Overall, our results have implications that extend beyond the surge that preceded the 2008 global financial crisis, and that closely resonate in light of the financial disruptions that followed the COVID-19 pandemic.
IMF Working Papers
The Netherlands has ambitious greenhouse gas emission reduction targets for the future - to cut t... more The Netherlands has ambitious greenhouse gas emission reduction targets for the future - to cut them by 49 percent below 1990 levels by 2030 and 95 percent by 2050. These targets and the likely new EU-wide targets under the recent EU Green Deal entail a rapid acceleration in decarbonization. This paper discusses the government’s mitigation strategy and advances several recommendations to complement and reinforce that strategy and to achieve better alignement of the effective carbon prices across sectors. The paper discusses alternatives to make the recently-introduced industry carbon levy more effcient and recomends the use of revenue-neutral feebate schemes in industry, transportation, buildings, and agriculture. For power generation, it recommends eliminating taxes on residential and industrial electricity, supplementing the coal phaseout plan with an increase in the CO2 emissions floor price. The impacts of these reforms on consumption would be low and relatively evenly split across the income distribution.
IMF Working Papers
France is the top agricultural producer in the European Union (EU), and agriculture plays a promi... more France is the top agricultural producer in the European Union (EU), and agriculture plays a prominent role in the country's foreign trade and intermediate exchanges. Reflecting production volumes and methods, the sector, however, also generates significant negative environmental and public health externalities. Recent model simulations show that a well-designed shift in production and consumption to make the former sustainable and align the latter with recommended values can curb these considerably and generate large macroeconomic gains. I propose a policy toolkit in line with the government's existing sectoral policies that can support this transition.
IMF Working Papers, 2016
We revisit the empirical relationship between private/public debt and output, and build a model t... more We revisit the empirical relationship between private/public debt and output, and build a model that reproduces it. In the model, the government provides financial assistance to credit-constrained agents to mitigate deleveraging. As we observe in the data, surges in private debt are potentially more damaging for the economy than surges in public debt. The model suggests two policy implications. First, capping leverage leads to milder recessions, but also implies more muted expansions. Second, with fiscal buffers, financial assistance to credit-constrained agents helps avoid stagnation. The growth returns from intervention decline as the government approaches the fiscal limit.
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Papers by Nicoletta Batini