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Title :Essays on monetary policy rules allowing for structural breaks
Creator :Kazanas, Thanassis
Contributor :Tzavalis, Elias (Επιβλέπων καθηγητής)
Athens University of Economics and Business, Department of Economics (Degree granting institution)
Type :Text
Extent :181p.
Language :en
Abstract :Macroeconomic stabilization policy entails the design and implementation of monetary and/or fiscal policy rules so as the macroeconomic variables of interest to meet their targeted levels within some reasonable time period. Nowadays there has been a great come back of interest in the issue of how to conduct monetary policy. One factor of this phenomenon is the huge volume of recent working papers and conferences on the topic. Another is that over the last years specific policy rules have been proposed by many leading macroeconomists. John Taylor’s recommendation of a simple interest rate rule (Taylor (1993a)) and the widespread endorsement of inflation targeting (e.g., Ben Bernanke and Frederic Mishkin (1997)) are well known examples. This thesis aims at providing a deeper understanding of the role of monetary policy in stabilizing inflation and output in a closed as well as in a small open economy when regime switching is allowed. For this reason, non-linear monetary policy rules are examined allowing for regime shifts in a subset or the whole of their parameters. The thesis includes four case studies. Using an endogenous backward-looking threshold model and data on three large economies, the US, the UK and Japan, the first study investigates if monetary policy changes depend on business cycle conditions, i.e. recessions and expansions of the economy. Then, we evaluate the policy implications of this monetary policy rule. Using a long span of data, the study provides clear cut evidence that, while during expansions the monetary authorities of the above countries follow the Taylor rule, during recessions they tend to abandon this policy rule and follow a passive monetary policy focused on interest rate smoothing over time. As shown in a New Keynesian framework, this passive monetary policy can not dampen the volatility effects of negative demand or supply macroeconomic shocks on the economy. The purpose of the second study is to test empirically in a forward-looking environment whether the above major central banks have monetary policy reaction functions that change depending on the actual state of the economy. We consider a forward-looking threshold type nonlinear monetary policy model that allows the existence of two policy regimes according to whether the output gap is above or below a threshold value. The model allows for endogenous variables and an4exogenous or endogenous threshold variable. The threshold parameter is estimated with two stage least squares in a first step while the slope parameters are estimated with the generalized method of moments in a second. The results give evidence of nonlinearity in the policy reaction functions which is associated with large output gap or high level of unemployment rate. The study also simulates a New Keynesian model calculating its impulse response functions in order to evaluate the effects of regime-switching in conducting monetary policy. The next case study provides evidence that, since the sign of Maastricht Treaty, euro-area monetary authorities and the ECB follow a strong anti-inflationary policy. This policy can be described by a threshold monetary policy rule model which distinguish two inflation policy regimes: low and high. The study finds that the euro-area monetary policy authorities react more strongly to positive inflation and/or output deviations from their target levels rather than to the negative, often occurring during recession periods. These authorities do not seem to react to negative output deviations in the low-inflation regime. Based on a small simulation study of a New Keynesian model, the study indicates that the no reaction of the euro-area monetary authorities to negative output deviations reduces the efficiency of their policy rule to dampen the effects of negative demand shocks on the economy. Finally, the fourth study suggests an open economy forward looking threshold monetary policy rule model for Japan. This model assumes that, in addition to inflation rate and real output deviations, the short term nominal interest rate of the central bank (CB) of Japan responds to nominal (or real) exchange rate deviations from their target levels. This happens only when the economy lies in the recession regime. This result means that a depreciation in Japan's currency will tend to offset decreases in the short term interest rate of the CB due to negative deviations in inflation and real output. A small scale open economy model simulated by this study shows that the above offsetting effects of exchange rate deviations on interest rates help to reduce the volatility of real exchange rates (the terms of trade) coming from exogenous shocks in domestic real productivity, foreign output and inflation.
Subject :Monetary policy
Business cycles
Fiscal policy
Structural breaks
Date :31-05-2011
Licence :

File: Kazanas_2011.pdf

Type: application/pdf