How should monetary authorities react to an oil price shock? This paper shows that in a noncompetitive economy, policies that perfectly stabilize prices entail large welfare costs, hence explaining the reluctance of policymakers to enforce them. The policy trade-off is nontrivial because oil (energy) is an input to both production and consumption. As welfaremaximizing policies are hard to implement and communicate, I derive a simple interest rate rule that depends only on observables but mimics the optimal plan in all dimensions. The optimal rule is hard on core inflation but accommodates oil price changes.JEL codes: E32, E52, E58

We examine the optimal monetary policy in the presence of endogenous feedback loops between asset prices and economic activity when macroprudential policies can also be pursued. Absent macroprudential policies, the optimal monetary policy leans against asset prices and can be closely approximated, using a speed‐limit rule that responds to the growth of financial variables. An endogenous feedback loop is crucial for this result: price stability is otherwise quasi‐optimal. Similarly, a simple macroprudential rule that links reserve requirements to credit growth dampens the endogenous feedback loop and leads to near price stability. State‐contingent taxes on lending are shown to be welfare‐improving.

How should monetary authorities react to an oil price shock? The New Keynesian literature has concluded that ensuring complete price stability is the optimal thing to do. In contrast, this paper argues that a meaningful trade-off between stabilizing inflation and the welfare relevant output gap arises in a distorted economy once one recognizes (i) that oil (energy) cannot be easily substituted by other factors in the short-run, (ii ) that there is no fiscal transfer available to policymakers to neutralize the steady-state distortion due to monopolistic competition, and (iii ) that increases in oil prices also directly affect consumption by raising the price of fuel, heating oil, and other energy sources. While the first two conditions are necessary to introduce a microfounded monetary policy trade-off, the third one makes it quantitatively significant.The optimal precommitment monetary policy relies on unobservables and is therefore hard to implement. To address this concern, I derive a simple interest rate feedback rule that mimics the optimal plan in all relevant dimensions but that depends only on observables, namely core inflation, oil price inflation, and the growth rate of output.

We examine the optimal monetary policy in the presence of endogenous feedback loops between asset prices and economic activity. We reconsider this issue in the context of the financial accelerator model and when macroprudential policies can be pursued. Absent macroprudential policy, we first show that the optimal monetary policy leans considerably against movements in asset prices and risk premia. We show that the optimal policy can be closely approximated and implemented using a speed-limit rule that places a substantial weight on the growth of financial variables. An endogenous feedback loop is crucial for this result, and price stability is otherwise quasi-optimal. Similarly, introducing a simple macroprudential rule that links reserve requirements to credit growth dampens the endogenous feedback loop, leading the optimal monetary policy to focus on price stability.

We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.

This paper proposes a new, production theory approach to the determination of the real exchange rate, which is defined as the relative price of traded to nontraded goods as is common in the international trade literature. Using a Translog real GDI function that describes the aggregate technology of an open economy as a starting point, the real exchange rate can be formally derived as a function of domestic excess savings, the terms of trade, relative factor endowments and technological progress. Empirical results for Switzerland suggest that the main drivers of the real exchange rate are the terms of trade, followed by relative factor endowments. Contrary to conventional wisdom, the Balassa-Samuelson effect does not seem to play a significant role in explaining the long-term real appreciation of the Swiss franc. Keywords Real exchange rate Á Technological change Á Terms of trade Á Factor intensity Á Middle products Á Nontraded goods JEL Classification F11 Á O47 Á C43 Á D33

a The authors are very grateful to Bruno Parnisari and Peter Steiner (SECO) for supplying previously unavailable data on Swiss sectoral value added, as well as to Gian Maria Milesi Feretti (IMF) for placing his international data set on net foreign assets at our disposal and Richard McKenzie (OECD) for valuable data suggestions. We also wish to thank Thomas Moser, Ulrich Kohli, Michel Peytrignet, Luca Ricci as well as participants to SNB internal seminars for helpful discussions. Finally we thank two anonymous referees: the paper has taken substantial advantage of their comments. The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the view of their affiliated organisations.

In this paper we offer a justification for the observed wide variation in monetary practices across industrial countries. We claim that differences in the monetary policy rule adopted may simply reflect differences in economic structure and, in particular, in the types of shocks encountered and nominal rigidities present in various countries. We find that a case for inflation targeting can be made when external shocks are the prevalent source of volatility in the economy -a likely scenario for a small open economy. A policy of strict inflation targeting performs best when the main source of nominal rigidity is to be found in the labour market, while a policy of flexible inflation targeting that also puts some emphasis on exchange rate volatility has superior performance when the main source of nominal rigidity is in the goods market. Domestic supply shocks, on the other hand, call for greater tolerance of short-run inflation movements, especially in the presence of nominal wage rigidities.Ã We thank Fabio Ghironi, Alan Stockman and two anonymous referees for valuable comments and discussions. The views expressed are solely the responsibility of the authors and should not be interpreted as reflecting the views of their affiliations or of any other person associated with them.