Handbook of Monetary Economics (eBook)

Front Cover 1
Handbook of Monetary Economics 4
Copyright Page 5
Table of Contents 6
INTRODUCTION TO THE SERIES 3
Contributors 16
Preface 18
Part Four: Optimal Monetary Policy 24
Chapter 13. The Optimal Rate of Inflation 26
1. Introduction 27
2. Money Demand and the Optimal Rate of Inflation 31
3. Money Demand, Fiscal Policy and the Optimal Rate of Inflation 37
4. Failure of the Friedman Rule Due to Untaxed Income: Three Examples 40
5. A Foreign Demand For Domestic Currency and the Optimal Rate of Inflation 48
6. Sticky Prices and the Optimal Rate of Inflation 57
7. The Friedman Rule Versus Price-Stability Trade-Off 68
8. Does the Zero Bound Provide a Rationale for Positive Inflation Targets? 74
9. Downward Nominal Rigidity 77
10. Quality Bias and the Optimal Rate of Inflation 79
11. Conclusion 88
References 93
Chapter 14. Optimal Monetary Stabilization Policy 96
1. Introduction 97
2. Optimal Policy in a Canonical New Keynesian Model 99
3. Stabilization and Welfare 132
4. Generalizations of the Basic Model 163
5. Research Agenda 191
References 199
Chapter 15. Simple and Robust Rules for Monetary Policy 202
1. Introduction 203
2. Historical Background 203
3. Using Models to Evaluate Simple Policy Rules 206
4. Robustness of Policy Rules 217
5. Optimal Policy Versus Simple Rules 223
6. Learning from Experience Before, During and after the Great Moderation 225
7. Conclusion 228
References 229
Chapter 16. Optimal Monetary Policy in Open Economies 234
1. Introduction and Overview 235
2. Part I: Optimal Stabilization Policy and International Relative Prices with Frictionless Asset Markets 242
3. A Baseline Monetary Model of Macroeconomic Interdependence 243
4. The Classical View: Divine Coincidence in Open Economies 259
5. Skepticism on the Classical View: Local Currency Price Stability of Imports 267
6. Deviations from Policy Cooperation and Concerns with “Competitive Devaluations” 282
7. Part II: Currency Misalignments and Cross-Country Demand Imbalances 288
8. Macroeconomic Interdependence Under Asset Market Imperfections 288
9. Conclusions 301
References 302
Part Five: Constraints on Monetary Policy 307
Chapter 17. The Interaction Between Monetary and Fiscal Policy 308
1. Introduction 309
2. Positive Theory of Price Stability 310
3. Normative Theory of Price Stability: Is Price Stability Optimal? 346
References 368
Chapter 18. The Politics of Monetary Policy 374
1. Introduction 375
2. Rules Versus Discretion 376
3. Central Bank Independence 386
4. Political Business Cycles 400
5. Currency Unions 407
6. The Euro 414
7. Conclusion 419
References 423
Chapter 19. Inflation Expectations, Adaptive Learning and Optimal Monetary Policy 428
1. Introduction 429
2. Recent Developments in Private-Sector Inflation Expectations 432
3. A Simple New Keynesian Model of Inflation Dynamics Under Rational Expectations 434
4. Monetary Policy Rules And Stability Under Adaptive Learning 438
5. Optimal Monetary Policy Under Adaptive Learning 444
6. Some Further Reflections 462
7. Conclusions 464
References 465
Chapter 20. Wanting Robustness in Macroeconomics 470
1. Introduction 471
2. Knight, Savage, Ellsberg, Gilboa-Schmeidler, and Friedman 473
3. Formalizing a Taste for Robustness 478
4. Calibrating a Taste for Robustness 483
5. Learning 490
6. Robustness in Action 506
7. Concluding Remarks 521
References 528
Part Six: Monetary Policy in Practice 531
Chapter 21. Monetary Policy Regimes and Economic Performance: The Historical Record, 1979–2008 532
1. Introduction 533
2. Monetary Targetry, 1979–1982 541
3. Inflation Targets 556
4. The “Nice Years,” 1993–2006 558
5. Europe and the Transition to the Euro 577
6. Japan 582
7. Financial Stability and Monetary Policy During the Financial Crisis 589
8. Conclusions and Implications for Future Central Bank Policies 594
References 604
Chapter 22. Inflation Targeting 610
1. Introduction 611
2. History and Macroeconomic Effects 615
3. Theory 623
4. Practice 648
5. Future 659
References 668
Chapter 23. The Performance of Alternative Monetary Regimes 676
1. Introduction 677
2. Some Simple Evidence 679
3. Previous Work on Inflation Targeting 686
4. The Euro 691
5. The Role of Monetary Aggregates 698
6. Hard Currency Pegs 701
7. Conclusion 705
References 714
Chapter 24. Implementation of Monetary Policy: How Do Central Banks Set Interest Rates? 718
1. Introduction 719
2. Fundamental Issues in the Mode of Wicksell 726
3. The Traditional Understanding of “How they do that” 733
4. Observed Relationships Between Reserves and the Policy Interest Rate 748
5. How, Then, Do Central Banks Set Interest Rates? 758
6. Empirical Evidence on Reserve Demand and Supply within the Maintenance Period 772
7. New Possibilities Following the 2007–2009 Crisis 787
8. Conclusion 805
References 806
Chapter 25. Monetary Policy in Emerging Markets 812
1. Introduction 814
2. Why Do We Need Different Models for Emerging Markets? 816
3. Goods Markets, Pricing, and Devaluation 818
4. Inflation 826
5. Nominal Targets for Monetary Policy 829
6. Exchange Rate Regimes 834
7. Procyclicality 838
8. Capital Flows 845
9. Crises in Emerging Markets 854
10. Summary of Conclusions 871
References 872
Index-Volume 3B 894
Index-Volume 3A 934