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Author: Martin S. Feldstein
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 90
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Book Description
This paper studies the possibility of using the broad monetary aggregate M2 to target the quarterly rate of growth of nominal GDP. Our findings indicate that the Federal Reserve could probably guide M2 in a way that reduces not only the long-term average rate of inflation but also the variance of the annual rate of growth of nominal GDP. An optimal M2 rule, derived from a simple VAR, reduces the mean ten-year standard deviation of annual GDP growth by over 20 percent. Although there is uncertainty about this value because of both parameter uncertainty and stochastic shocks to the economy, we estimate that the probability that the annual variance would be reduced over a ten year period exceeds 85 percent. A much simpler policy based on a single equation linking M2 and GDP is shown to be almost as successful in reducing this annual GDP variance. Additional statistical tests indicate that M2 is a useful predictor of nominal GDP. Moreover, a battery of recently developed tests for parameter stability fails to reject the hypothesis that the M2 - GDP link is stable, but the MI - GDP and monetary base - GDP relations are found to be highly unstable. This evidence contradicts those who have argued that the M2 - GDP relation is so unstable in the short run that it cannot be used to reduce the variance of nominal GDP growth.
Author: Martin S. Feldstein
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 90
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Book Description
This paper studies the possibility of using the broad monetary aggregate M2 to target the quarterly rate of growth of nominal GDP. Our findings indicate that the Federal Reserve could probably guide M2 in a way that reduces not only the long-term average rate of inflation but also the variance of the annual rate of growth of nominal GDP. An optimal M2 rule, derived from a simple VAR, reduces the mean ten-year standard deviation of annual GDP growth by over 20 percent. Although there is uncertainty about this value because of both parameter uncertainty and stochastic shocks to the economy, we estimate that the probability that the annual variance would be reduced over a ten year period exceeds 85 percent. A much simpler policy based on a single equation linking M2 and GDP is shown to be almost as successful in reducing this annual GDP variance. Additional statistical tests indicate that M2 is a useful predictor of nominal GDP. Moreover, a battery of recently developed tests for parameter stability fails to reject the hypothesis that the M2 - GDP link is stable, but the MI - GDP and monetary base - GDP relations are found to be highly unstable. This evidence contradicts those who have argued that the M2 - GDP relation is so unstable in the short run that it cannot be used to reduce the variance of nominal GDP growth.
Author: Moon Oulatta
Publisher:
ISBN: 9780355913453
Category : Economics
Languages : en
Pages : 143
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Book Description
This dissertation investigates the prospect of adopting a flexible exchange rate regime with the nominal gross domestic product (GDP) as the intermediate target for the conduct of monetary policy for the members of the West African Economic and Monetary Union (WAEMU). In the first chapter, we begin by assessing the choice of exchange rate regime based on three criteria: exchange rate volatility, exposure to real shocks, and institutional capacities. The current peg with the euro remains the de facto political choice for the WAEMU, but also a reliable option for ensuring monetary policy discipline and allaying risks of currency convertibility. However, we argue that exchange rate flexibility is increasingly becoming more viable due to the overall improvement in the central bank's operational and statistical capacities, the high degree of exposure to terms of trade shocks, and the recent change in the WAEMU's trade patterns away from Europe. Therefore, given the case for exchange rate flexibility, we examine the pros and cons of three types of flexible exchange rate regime: inflation targeting, monetary aggregate targeting, and nominal GDP targeting. The main conclusion is that while all three types of flexible exchange rate regime would provide a firm commitment to a nominal anchor, monetary aggregate targeting would be the most practical option to pursue, because monetary aggregate data are highly observable, prone to almost no revisions, and price stability would be guaranteed by preventing excessive money growth. Alternatively, given the poor growth performance realized in the last decade and increasing vulnerability to supply shocks (for example, falling commodity prices and drastic droughts), we argue that under the right circumstances (for example, when the economy is operating far below potential output), choosing a flexible exchange rate regime that allows monetary authorities to prioritize both employment and price stability such as nominal GDP targeting would be most desirable as compared to adopting a flexible exchange rate regime in which the intermediate target of monetary policy is to keep a monetary aggregate or the inflation rate on target. A commitment to stabilize nominal GDP would force the monetary authorities to prioritize employment in the short run without giving up on achieving price stability in the long run. In the second chapter, we examine the stabilizing properties of using nominal GDP as the intermediate target as compared to using the inflation rate, a monetary aggregate, or the exchange rate. We provide a contribution to Bhandari and Frankel's (2015) model by imposing a cost for data uncertainty into the central bank quadratic loss functions, especially under inflation targeting and nominal GDP targeting. First, we show that no precommitment to a nominal anchor leads to a suboptimal outcome. Then, we derive the optimal conditions to determine whether a precommitment to a nominal GDP target would minimize the variability of real output, inflation, and the nominal exchange rate more efficiently than a precommitment to an inflation target, a monetary aggregate target, or an exchange rate target. We draw three main conclusions from the result of the simulations. First, the exchange rate is the least optimal among the choices of nominal anchors considered for the WAEMU. Second, nominal GDP targeting minimizes the central bank's quadratic loss function in an open economy setting given some parameter values for nominal GDP data uncertainty. Third, monetary aggregate targeting is slightly more robust than inflation targeting and exchange rate targeting. In conclusion, the main policy recommendation is that the central bank should prioritize nominal GDP among the choices of nominal anchors. However, in the event of large nominal GDP data revisions or poor data quality, then the secondary option should be to commit to a monetary aggregate target. In the third chapter, we devise a strategy for implementing nominal GDP targeting for the WAEMU by taking into consideration the existing practical concerns of data revisions and the unavailability of quarterly estimates of aggregate nominal GDP. Given the macroeconomic structure of the WAEMU and the magnitude of the estimated shocks affecting the economy, we demonstrate that a monetary aggregate instrument is superior to an interest rate instrument for the WAEMU. Hence, we propose a money-based rule similar to McCallum's (1987) rule, where the central bank is to announce an annual target for nominal GDP growth and use the monetary base as the operational target. Given the discovery of a robust empirical link between aggregate nominal GDP and aggregate nominal trade (value of exports plus imports) and the availability of trade data on a high frequency with minor revisions, we propose to rely on quarterly estimates of nominal trade as a means to solve the existing data issues coming from large revisions and low frequency data. (Abstract shortened by ProQuest.).
Author: William A. Barnett
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Jouni Timonen
Publisher:
ISBN:
Category :
Languages : en
Pages : 66
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Book Description
Tiivistelmä.
Author: Brian Griffiths
Publisher: Springer
ISBN: 1349165557
Category : Business & Economics
Languages : en
Pages : 248
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Author: N. Gregory Mankiw
Publisher: University of Chicago Press
ISBN: 0226503100
Category : Business & Economics
Languages : en
Pages : 358
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Book Description
In Monetary Policy, leading monetary economists discuss applied aspects of monetary policy and offer practical new research on the timing, magnitude, and channels of central banking actions. Some of the papers in this volume evaluate a variety of policy rules based on monetary aggregates, nominal income, commodity prices, and other economic variables. Others analyze price behavior and inflation, particularly the short-run behavior of prices. Still others examine the monetary transmission mechanism—the channel through which the central bank's actions affect spending on goods and services—with a special focus on the reduction in bank lending that must accompany a reduction in reserves. This new research will be of special interest to central bankers and academic economists.
Author: Bennett T. McCallum
Publisher:
ISBN:
Category : Econometric models
Languages : en
Pages : 60
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Author: Richard Dennis
Publisher:
ISBN:
Category : Gross domestic product
Languages : en
Pages : 42
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Author: Mr.Paul R. Masson
Publisher: International Monetary Fund
ISBN: 145185515X
Category : Business & Economics
Languages : en
Pages : 54
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Book Description
Inflation targeting (IT) serves as monetary policy framework in several advanced economies, where it has enhanced policy transparency and accountability. The paper considers its wider applicability to developing countries. The prerequisites for a successful IT framework are identified as an ability to carry out an independent monetary policy (free of fiscal dominance or commitment to another nominal anchor, like the exchange rate) and a quantitative framework linking policy instruments to inflation. These prerequisites are largely absent among developing countries, though several of them could with some further institutional changes and an overriding commitment to low inflation make use of an IT framework.
Author: Kent Matthews
Publisher: John Wiley & Sons
ISBN: 0470032812
Category : Business & Economics
Languages : en
Pages : 210
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Book Description
Since the Bank of England was made independent in 1997, the conduct of monetary policy has been relatively uncontroversial. The debates between Keyneisans, monetarists and supporters of fixed exchange rate mechanisms now appear very distant. Despite the apparent consensus there are many issues related to the conduct of monetary policy that are not yet settled and which will soon come to the fore. Is the current form of independence for the Bank of England appropriate? Should a central bank target inflation or the prices level? How does a central bank deal with asset price deflation? Should more account be taken of monetary aggregates? Should central banks target asset prices? What is the relationship between the money supply and asset price inflation? How should central banks ensure financial stability? The IEA was at the forefront of changing the parameters of the debate surrounding monetary policy in the 1970s and 1980s. This text, brings together some of the leading authors in the field, including the current Governor of the Bank of England, to discuss current issues in monetary policy and the relationship between monetary policy and financial markets. It is appropriate for undergraduates and postgraduates in economics and finance as well as for practitioners in financial markets.
