Monetary policy

Henrike Michaelis, Volker Wieland, 12 May 2017

In recent speeches, Federal Reserve Chair Janet Yellen and ECB President Mario Draghi have attributed the Fed’s and the ECB’s low interest rate environment to low equilibrium rates rather than to Fed or ECB policies. This column argues that estimates of these equilibrium rates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of the policy stance. But if used nevertheless, a consistent application together with associated output estimates call for a tightening of the policy stance. 

Fredrik Andersson, Lars Jonung, 08 May 2017

Inflation-targeting central banks commonly fail to hit their official inflation targets, so targets are combined with a tolerance band which is either implicit or explicit. Taking the Swedish Riksbank as an example, this column argues that adopting an explicit tolerance band would better communicate to the public the central bank’s lack of full control over the rate of inflation and thus foster public confidence in monetary policy, and it would also increase the central bank’s ability to stabilise the economy. The width of the band can be derived from the historical inflation outcome. 

Neil Ericsson, David Hendry, Stedman Hood, 04 May 2017

When empirically modelling the US demand for money, Milton Friedman more than doubled the observed initial stock of money to account for a “changing degree of financial sophistication” in the US relative to the UK. This column discusses effects of this adjustment on Friedman’s empirical models. His data adjustment dramatically reduced apparent movements in the velocity of circulation of money, and it adversely affected the constancy and fit of his estimated money demand models. 

Ed Balls, Anna Stansbury, 01 May 2017

Until recently, the independence granted to the Bank of England 20 years ago had gone unchallenged. But the financial crisis has raised questions over whether central bank independence is necessary, feasible, and democratic. This column revisits the relationship between inflation and the operational and political independence of the central bank in advanced economies. The findings support the Bank of England model of monetary policy independence: fully operationally independent, but somewhat politically dependent. To make operational independence work, however, further reforms are needed to the model in both monetary–fiscal coordination and macroprudential policy.

Refet Gürkaynak, Cédric Tille, 28 April 2017

Are Dynamic Stochastic General Equilibrium (DSGE) models worthwhile? Some economists suggest not, due to their complex nature and disputable assumptions.  This column introduces a new eBook which provides an all-round evaluation of DSGE models, widely used by many central banks, by looking at their current and historical uses as well as their future position in economics.

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