Kirsten Ralf

A minimal central bank credibility, with a non-zero probability of not renegning his commitment ("quasi-commitment"), is a necessary condition for anchoring inflation expectations and stabilizing inflation dynamics. By contrast, a complete lack of credibility, with the certainty that the policy maker will renege his commitment ("optimal discretion"), leads to the local instability of inflation dynamics. In the textbook example of the new-Keynesian Phillips curve, the response of the policy instrument to inflation gaps for optimal policy under quasi-commitment has an opposite sign than in optimal discretion, which explains this bifurcation.

This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilisation policy from 1948 to 1975 and the subsequent break of the use of control for stabilisation policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favoured their support of rules against discretionary stabilisation policy. The Lucas critique and Kydland and Prescott’s time-inconsistency were over-statements that led to the “dark ages” of the prevalence of the stabilisation-policy-ineffectiveness idea. These over-statements were later revised following the success of the Taylor rule.

This paper compares Ramsey optimal policy for the new-Keynesian model with public debt with its fiscal theory of the price level (FTPL) equilibrium. Both, the fiscal theory of the price level and Ramsey optimal policy, imply that a deficit shock is instantaneously followed by an increase of inflation and output gap. But each optimal policy parameters belongs in different sets with respect to FTPL. The optimal fiscal rule parameter implies local stability of public debt dynamics
("passive fiscal policy"). Thee optimal Taylor rule parameter for inflation is larger than one. The optimal Taylor rule parameter fo routput gap is negative, because of the intertemporal substitution effect of interest rate on output gap. Both Taylor rule optimal parameters imply the local stability of inflation and output gap dynamics.

For panel data models including time-invariant variables, this paper proposes a new Hausman pretest estimator of the internal instruments of the Hausman-Taylorestimator. It assumes Mundlakand Krishnakumar linear specification for the endogeneity of random individual effects. Furthermore, the paper evaluates the biases of currently used estimators:
repeated between, ordinary least squares, two-stage restricted between, Oaxaca-Geisler estimator, fixed effect vector decomposition, and generalized least squares. Some of these may lead to erroneous conclusions regarding the statistical significance of the estimated parameter values of time-invariant variables, especially when time-invariant variables are correlated with the individual effects.

This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short term commitment (based on a negative-feedback mechanism) to a Taylor rule
(based on a positive-feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (in ation and output gap) are forward-looking variables in the new-Keynesian theory.

The aim of the present paper is to provide criteria for a central bank of how to choose among di¤erent monetary-policy rules when caring about a number of policy targets such as the output gap and expected inflation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.

With non-controllable auto-regressive shocks, the welfare of Ramsey optimal policy is the solution of a Ricattiequation of a linear quadratic regulator. The existing theory by Hansen and Sargent (2007) refers to an additional Sylvester equation but miss another equation for computing the block matrix weighting the square of non-controllable variables in the welfare function. There is no need to simulate impulse response functions over a long period, to compute period loss functions and to sum their discounted value over this long period, as currently done so far. Welfare is computed for the case of the new-Keynesian Phillips curve with an auto-regressive cost-push shock.

We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended set-up in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy.

This article presents an algorithm that extends Ljungqvist and Sargent's (2012) dynamic Stackelberg game to the case of dynamic stochastic general equilibrium models including forcing variables. Its first step is the solution of the discounted augmented linear quadratic regulator as in Hansen and Sargent (2007). It then computes the optimal initial anchor of "jump" variables such as inflation. We demonstrate that it is of no use to compute non-observable Lagrange multipliers for all periods in order to obtain impulse response functions and welfare. The algorithm presented, however, enables the computation of a history-dependent representation of a Ramsey policy rule that can be implemented by policy makers and estimated within a vector auto-regressive model. The policy instruments depend on the lagged values of the policy instruments and of the private sector's predetermined and "jump" variables. The algorithm is applied on the new-Keynesian Phillips curve as a monetary policy transmission mechanism.

A number of macroeconomic theories, very popular in the 1980s, seem to have completely disappeared and been replaced by the dynamic stochastic general equilibrium (DSGE) approach. We will argue that this replacement is due to a tacit agreement on a number of assumptions, previously seen as mutually exclusive, and not due to a settlement by ‘nature’. As opposed to econometrics and microeconomics and despite massive progress in the access to data and the use of statistical software, macroeconomic theory appears not to be a cumulative science so far. Observational equivalence of different models and the problem of identification of parameters of the models persist as will be highlighted by examining two examples: one in growth theory and a second in testing inflation persistence.

Abstract

Cet article montre que des règles de politiques macroéconomiques avec engagement permettent aux décideurs politiques de stabiliser des grandeurs macroéconomiques (inflation, prix d’actifs, dettes) lorsque leur croissance est trop élevée (bulles) ou leur décroissance trop forte (krach). Cette stabilisation évite de faire diverger une économie de sa tendance moyenne de croissance à long terme vers une stagnation ou un effondrement. Dans ce cadre, les décideurs politiques ancrent de manière unique et avec crédibilité les anticipations rationnelles initiales des agents du secteur privé. Ensuite, cet article pose des conditions d’identification des paramètres des règles de politique économique optimale avec engagement, des règles optimales cohérentes temporellement, et des règles quasi optimales. Il conclut en présentant les avantages et inconvénients de ces trois types de règles pour la modélisation macroéconomique en fonction de plusieurs critères.

Abstract

In multiple regressions, explanatory variables with simple correlation coefficients with the dependent variable below 0.1 in absolute value (such as aid/gross domestic product (GDP) with GDP growth)face a problem of parameter identification. They may have very large,statistically significant, estimated parameters which are unfortunately "outliers driven" and spurious. This is obtained by including another regressor which is highly correlated with the initial regressor, such as a lag, a square or interaction terms of this regressor. The analysis applied on the "Gambia and Botswana outliers driven" Burnside and Dollar [2000] article which found that aid/GDP had an effect on growth only for countries achieving "good" macroeconomic policies.

Abstract

Cet article montre qu’une régression multiple avec deux variables explicatives très corrélées entre elles, et dont les corrélations simples avec une variable dépendante sont quasi nulles, peut correspondre soit à une régression fallacieuse, soit à un modèle homéostatique très sensible à la présence d’observations atypiques à fort levier. La méthode de régression ne permet pas de distinguer entre ces deux modèles. La significativité statistique des paramètres, par ailleurs très élevés, est facile à obtenir dans ce cas, comme le montre une simulation de Monte-Carlo. Un exemple est donné par l’article de Burnside et Dollar [2000], sur les liens entre aide au développement, politiques économiques et croissance.

Abstract

The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its "fundamental long term value". Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory