Output Gaps and Robust Monetary Policy Rules

Billi, Roberto M.

doi:10.2139/ssrn.2092536

Cited by 10 publications

(19 citation statements)

References 16 publications

(13 reference statements)

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“…Taylor and Williams (2010) also find that, absent a lower bound on the policy rate, policies that respond to the change in the output gap tend to be close to optimal -a finding also suggested in, for example, Blake (2012). Billi (2011) raise questions about the efficacy of responding the change in the output gap once the analysis acknowledges the zero-lower bound -a concern that our analysis suggests is quantitatively very important.…”

Section: Introductionsupporting

confidence: 65%

Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination

Chung¹,

Herbst²,

Kiley³

2014

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We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero-lower bound episodes -to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: In particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero-lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.

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Section: Introductionsupporting

confidence: 65%

Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination

Chung¹,

Herbst²,

Kiley³

2014

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“…One reason for the poor performance of the estimated rule is its sizable response to the change in the output gap; such a response implies that accommodation is removed as soon as a recovery begins (rather than waiting until the level of activity has recovered)-a response that short-circuits a recovery as emphasized by Billi (2011).…”

Section: Economic Performance Under Traditional Approaches Iiiamentioning

confidence: 99%

Monetary Policy in a Low Interest Rate World

Kiley¹,

Roberts²

2017

FEDS

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Nominal interest rates may remain substantially below the averages of the last half-century, as central bank's inflation objectives lie below the average level of inflation and estimates of the real interest rate likely to prevail over the long run fall notably short of the average real interest rate experienced over this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a low-interest-rate world in a dynamic-stochastic-general-equilibrium (DSGE) model and large-scale econometric model, the FRB/US model. Several conclusions emerge. First, monetary policy strategies based on traditional policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches is significantly higher than in previous studies. Second, a risk-adjustment to a simple rule in which monetary policymakers are more accommodative, on average, than prescribed by the rule ensures that inflation achieves its 2 percent objective and requires that policymakers aim at inflation near 3 percent when the ELB is not binding. Third, commitment strategies in which monetary accommodation is not removed until either inflation or economic activity overshoot their long-run objectives are very effective in both the DSGE and FRB/US model. Finally, our results suggest that the adverse effects associated with the ELB may be substantial at inflation targets near 2 percent if r* is low and monetary policy follows a traditional policy approach. Whether such adverse effects could justify a higher inflation target depends on whether monetary policy strategies substantially different from traditional approaches are feasible and an assessment of the effects of the inflation target on economic welfare. ACKNOWLEDGMENTS

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“…The values of the parameters α, β, and σ are derived from Billi (2011) and correspond to those of Woodford (2003) for U.S. data with the nowadays conventional exception that the value of 1/σ represents a lower degree of interest-sensitivity of aggregate expenditure than originally employed by Woodford. The value of the quarterly discount factor (β = 0.99) implies that the steady state real interest rate is 4% annually.…”

Section: Numerical Examplementioning

confidence: 99%

Monetary policy and asset prices: When cleaning up hits the zero lower bound

Berger

Kißmer

2013

Swiss J Economics Statistics

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Summary Recently, convincing evidence has been presented that the recession in the wake of the recent financial crisis resulted primarily from an overly levered housing sector that was forced to deleverage and cut consumption spending when faced with collapsing housing prices. Following this interpretation it is argued that, as opposed to the consensus view on monetary policy in the vicinity of the ZLB, optimal monetary policy may involve an interest rate increase if the ZLB threatens to become a binding constraint in the aftermath of an asset price bust. This result delivers arguments to advocate a— in the previous literature less favored— pre-emptive tightening policy in an asset price boom.

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Output Gaps and Robust Monetary Policy Rules

Cited by 10 publications

References 16 publications

Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination

Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination

Monetary Policy in a Low Interest Rate World

Monetary policy and asset prices: When cleaning up hits the zero lower bound

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