The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

/pdf/the-science-of-monetary-policy-a-new-keynesian-perspective-1hk1n82x2a.pdf

The Science of Monetary Policy: A New Keynesian Perspective

This paper reviews the recent literature on monetary policy rules. To organize the discussion, we exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real word complications. We concentrate on developing results that are robust across a reasonable variety of competing macroeconomic frameworks. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation and consider the implications of frictions such as imperfect information and model uncertainty. Finally, we assess how proposed simple rules, such as the Taylor rule, square with the principles for optimal policy that we describe. We use this same metric to evaluate the recent course of U.S. monetary policy.

/pdf/the-science-of-monetary-policy-a-new-keynesian-perspective-2513aj8m00.pdf

In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.

Forecasting, Structural Time Series Models and the Kalman Filter

Econometric policy evaluation: A critique

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication-mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication, can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication, strategies across central banks suggests that a. consensus has yet to emerge, on what constitutes an optimal communication strategy.

/pdf/central-bank-communication-and-monetary-policy-a-survey-of-qnyqvbkzrj.pdf

Central bank communication and monetary policy: A survey of theory and evidence

In an article in this Journal, Dean Taylor (1982) proposes a simple statistical test of the significance of central bank losses in the exchange market: Would random intervention be likely to result in as large a loss? This comment shows that, as it stands, his test statistic does not allow properly for the effect of the mean level of intervention. There is in fact an element of ambiguity in the question Taylor poses, and this is illustrated with examples taken from his empirical work. The connection between the Taylor test and regression analysis is noted and explored.

https://www.jstor.org/stable/info/1833069

Official Intervention in the Foreign Exchange Market

1. Introduction: Asymmetric Information in Financial Markets 2. Adverse Selection and the Market for Retail Financial Services 3. The Structure and Regulation of Insurance Markets 4. Capital Market Microstructure and Regulation 5. Information Revelation, Transparency, and the Regulation of Insider Dealing 6. Security Research and Regulation 7. The Equity Market and Managerial Efficiency 8. The Theory of Financial Intermediation 9. Convexity, Excessive Risk, and Regulation of Banks 10. Bank Runs, Deposit Insurance, and the Role of the Regulator 11. Bank Regulation in Practice 12. Financial Structure and Regulation

/pdf/the-structure-and-regulation-of-financial-markets-3j9tu713ss.pdf

The Structure and Regulation of Financial Markets

Aimed at advanced undergraduate and graduate students in economics, banking, and finance, this is a core textbook for the financial markets, institutions, and regulation option of courses in financial economics. It integrates modern theories of asymmetric information into the analysis of financial institutions, relating the theory to current developments. The text begins with an analysis of adverse selection in retail financial products like life assurance before looking at open capital markets where trades and prices provide information. It then progresses to the more complex areas of corporate governance and financial intermediation in which information is confidential and moral hazard and verification problems become important. These chapters study the various mechanisms that the financial markets have developed to allow investors to delegate the management of their assets to others. This analysis is used to show how regulation can reduce the risk of financial failure and how legal, accounting, and regulatory mechanisms can help shape a country's corporate and financial architecture. These difficult theoretical concepts are conveyed through the careful use of numerical illustrations and topical case studies. Each chapter ends with a set of exercises to test and reinforce students' comprehension of the material. Worked solutions are provided for the numerical exercises.

The first part of the paper reviews the performance of the U.K.'s official monetary aggregates during the 1980s and argues that Divisia aggregation is, in principle, likely to offer a sounder basis for monetary analysis and policy. The central sections develop an econometric model of the demand for retail balances and examine the effect of portfolio disequilibrium, showing how this makes it appropriate to smooth the user costs in a particular way when using them to construct a Divisia aggregate. The final section of the paper shows that the resulting aggregate is closely associated with economic activity and prices once an allowance is made for the growth in the use of credit cards. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

Portfolio disequilibrium: implications for the divisia approach to monetary aggregation*

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates The Brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables These results suggest that the macro-finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk

https://dornsife.usc.edu/assets/sites/364/docs/Liu2012.pdf

Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009

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Papers

Official Intervention in the Foreign Exchange Market

The Structure and Regulation of Financial Markets

The Structure and Regulation of Financial Markets

Portfolio disequilibrium: implications for the divisia approach to monetary aggregation*

Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009