The forward fiscal guidance puzzle and a resolution

Economica, 1999

Journal of Money, Credit and Banking, 2018

The conventional policy perspective is that lowering the interest rate increases output and inflation in the short run, while maintaining inflation at a higher level requires a higher interest rate in the long run. In contrast it has been argued that a Neo-Fisherian policy of setting an interest-rate peg at a fixed higher level will increase the inflation rate. We show that adaptive learning argues against the neo-Fisherian approach. Pegging the interest rate at a higher level will induce instability and most likely lead to falling inflation and output over time. Eventually, this would precipitate a change of policy.

Federal Reserve Bank of Dallas, Globalization Institute Working Papers

Working papers from the Federal Reserve Bank of Dallas are preliminary drafts circulated for professional comment. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

The Review of Economic Studies, 1990

We consider a model in which the le't,el of taxes and seignorage are too low to finance government expenditures and debt service. Government debt will therefore grow without bound, implying the eventual need to change policy. Starting with utility maximization, we analyze the effect of the expected switch on equilibrium time paths before the switch takes place. We analyze stabilization via increasing taxes, increasing money growth rates, or cutting expenditures, both under certainty and under uncertainty about the composition or timing of a stabilization. Under full certainty, inflation may rise, fall, or remain constant before the stabilization, depending on which policy tool is used to stabilize. Uncertainty solely about the composition of the stabilization will yield paths in between the above cases, with a price Jump at the time of stabilization. In general there is no simple correlation between changes in the budget deficit and inflation. With uncertainty about the timing of a stabilization, the inflation rate will most likely exhibit fluctuations and may overshoot its steady state value, even when real balances move monotonically. Uncertainty about the timing of a stabilization can therefore itself induce fluctuation in inflation, even if underlying utility and subjective probability functions are smooth.

2006

Flexible inflation targeting -the minimisation of the expected discounted sum of current and future period losses, with the period loss function given by the weighted sum of squared deviations of inflation from a constant target rate and the squared output gapcannot be rationalised, except in a single, practically uninteresting special case, using conventional welfare economic criteria. Woodford's assertion to the contrary, based on New-Keynesian dynamic stochastic general equilibrium models, is generically incorrect for that class of models. New-Keynesian models imply that optimal monetary policy implements the Bailey-Friedman Optimal Quantity of Money rule and that actual inflation fully validates or accommodates the inflation heuristic -the inflation generated by rule-of-thumb price and/or wage setters.

Frbsf Economic Letter, 1994

2000

2001

Recherches économiques de Louvain, 2006

European Journal of Economics and Economic Policies: Intervention, 2009

While mainstream policies may be beyond improvement in the enchanted ›op-timizable‹ world, Post Keynesians have to manage without a magic wand in our uncertain world. We discuss the alternative policies proposed in the recent Post Keynesian literature and argue that control of interest rates is too imperfect for such policies to be feasible in general, although they provide useful guidelines and may be successful in favourable circumstances. Consequently, the question of credibility is irrelevant, if this means whether policy-makers will honour their commitment to an unfeasible ideal target. Th e right question is whether policy is convincing enough to make the conventional state of expectation (and the related interest rate) consistent with full employment. It is all a matter of confi dence. Th e basic principles involved in such an approach to monetary policy are discussed. JEL classifi cations: E12, E52

Journal of Economic Surveys, 2014

We survey literature comparing in ‡ation targeting (IT) and price-level targeting (PT) as macroeconomic stabilisation policies. Our focus is on New Keynesian models and areas that have seen signi…cant developments since Ambler's (2009) survey: optimal monetary policy; the zero lower bound; …nancial frictions; and transition costs of adopting a PT regime. Ambler's conclusion that PT improves social welfare in New Keynesian models is fairly robust, but we note an interesting split in the literature: PT consistently outperforms IT in models where policymakers commit to simple Taylor-type rules, but results in favour of PT when policymakers minimise loss functions are overturned with small deviations from the baseline model. Since the bene…cial e¤ects of PT appear to hang on the joint assumption that agents are rational and the economy New Keynesian, we discuss survey and experimental evidence on rational expectations and the applied macro literature on the empirical performance of New Keynesian models. Overall, the evidence is not clear-cut, but we note that New Keynesian models can pass formal statistical tests against macro data and that models with rational expectations outperform those with behavioural expectations (i.e. heuristics) in direct statistical tests. We therefore argue that policymakers should continue to pay attention to PT.

2004

2015

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. The interest-rate rules are subject to the zero lower bound. The domain of attraction of the targeted steady state is proposed as robustness criterion for a policy regime. Robustness of price-level and nominal GDP targeting depends greatly on whether forward guidance in these regimes is incorporated in private agents’ learning. We also analyze volatility of inflation, output and interest rate during learning adjustment for the different policy regimes. JEL Classification: E63, E52, E58.