Keywords
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
See Ball and Mankiw (1994a: 132) and the discussion in De Long (2000).
According to McCallum (2001a), this type of model represents the standard model used for macroeconomic analysis. For a nontechnical review, see King (2000). An extensive derivation and discussion is provided in Woodford (2002). The seminal contribution on the analysis of monetary policy in New Keynesian models is Clarida et al. (1999).
This discussion draws on Gali et al. (2001), King (2000), and Mankiw (2001).
For a discussion on the link between the capital stock and aggregate output see McCallum and Nelson (1997). They argue that to a large part the correlation is low because a typical year’s investment is very small in relation to the existing stock of capital. Regarding the second point, see Woodford (2002: Section 4.5). However, Woodford also notes that the transmission mechanism behind the similar output and inflation dynamics is quite different, owing to significant effects of the endogenous capital accumulation.
It is also possible to derive the New Keynesian Phillips curve using a CES function, which may be more appropriate for German data. For the theoretical derivation and empirical results for Germany see Carstensen (2002).
For a discussion of this and other New Keynesian Phillips curve models, see Roberts (1995).
See Woodford (2002: Section 3.2) for the details.
For a discussion see Rotemberg and Woodford (1997).
See also the discussion in Mankiw (2001).
For a discussion of the importance of real rigidities for New Keynesian models, see also Farmer (1999).
This sections draws on McCallum and Nelson (1997).
For tne interpretation of σ it is useful to notice that (4.25) can be rewritten as Ct+l+/Ct =[β(1 + rt)]σ. The inverse of a defines the relative risk aversion of households. The specific functional form chosen here implies that this parameter is constant. See also the discussion in Romer (1996: 40, 324).
See also the discussion in Clarida et al. (1999) on the New IS curve.
For a more explicit treatment of government consumption in the New Keynesian model, see McCallum and Nelson (1997: 25). For an open-economy extension of the model see McCallum and Nelson (2001). For a model with an endogenous capital stock see Casares and McCallum (2000).
See also Romer (1996: 324) and the discussion in King and Kerr (1996: 55).
see King (2000: 74). Here we equate the natural rate of output with the capacity level of output.
For this reason Romer (2000) argues that the LM curve can be dropped from modern macroeconomic models.
For further literature supporting this view, see Svensson (1999: 89ff.).
Both subsections draw on Clarida et al. (1999).
Put another way, the assumption of rational expectations implies that the private sector understands that the central bank is free to reoptimize every period and takes this into account in its expectation formation process. In the rational expectations equilibrium the central bank has therefore no incentive to change its behavior in an unexpected way. In this sense the policy that emerges in equilibrium is time-consistent. See Clarida et al. (1999) for this line of argument.
Clarida et al. (1999) show that one can construct an efficiency policy frontier which is a locus of points that characterize how the standard deviations of the output gap and inflation under the optimal policy, σχand σπ, vary with central bank preferences, defined by λ.
For this interpretation, see King (2000: 55).
For an extensive discussion of conditions for determinacy of equilibrium, see Woodford (2002: Section 4.2).
See also the discussion in McCallum (2001b: 146).
See also the discussion of the role of monetary policy shocks in SVAR models by Bagliano and Favero (1998: 1074).
See also the discussion in Mankiw (2001).
See also the discussion in Roberts (1997) of the Fuhrer-Moore result.
See also the discussion in Ball (1991).
For evidence on the costs of disinflation, see Ball (1996).
See also Gali et al. (2001: 1242).
The derivation of the Fuhrer-Moore model presented here draws on Roberts (1997).
See also the discussion in Roberts (1995).
For an empirical application of this approach to German data, see Carstensen (2002).
This section draws on McCallum and Nelson (1999).
The present author is only aware of the paper by Ireland (1997) that also employs the variance decomposition technique in a similar context. However, his model does not allow for IS or cost-push shocks.
This may appear to be a very large value relative to the choice of McCallum (2001a), but it should be noted that it is the relative size of the shocks that matters for the variance decomposition.
See Ireland (2001) for an example.
The economic interpretation of monetary policy shocks is also an important issue in SVAR models. See Bernanke and Mihov (1996) for a discussion.
Sims (1998: 933) observes in this context that this is a frequent finding in the SVAR literature. He writes, “Most variation in monetary policy instruments is accounted for by responses of policy to the state of the economy, not by random disturbances to policy behavior.”
See also the discussion in De Long (2000).
See also De Long (2000: 84).
The sample is 1979:10–1994:12. See Clarida et al. (1998: 1049).
The sample is 1979:3–1993:12. See Clarida et al. (1998: 1045).
Following the estimation of the Taylor rule in Deutsche Bundesbank (1999), we use West German data. The time series for real GDP and inflation are the same as those used in Figure 4.2. For the short-term interest rate we use a three-month interest rate provided by DATASTREAM (code: BD3MTH.R).
For the euro area, this transmission mechanism has been investigated in Gottschalk and Stolz (2001). The resulting dynamics turn out to be very complex, implying that the resulting information and transmission lags would make it very difficult for the central bank to exercise effective control over broad money.
For an investigation of the leading indicator qualities of monetary aggregates for economic conditions in the euro area, see Gottschalk et al. (2000). These authors find that monetary aggregates contain some information on economic conditions, but they are definitely not a sufficient statistic to forecast nominal demand.
However, the sticky-information New Keynesian Phillips curve proposed by Mankiw and Reis (2001) bears some resemblance to earlier monetarist models of inflation with adaptive expectations.
For a discussion of these channels, see Lindbeck and Snower (1994).
Rights and permissions
Copyright information
© 2005 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
(2005). Monetary Policy in the New Keynesian Model. In: Monetary Policy and the German Unemployment Problem in Macroeconomic Models. Kieler Studien - Kiel Studies, vol 334. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-37679-8_4
Download citation
DOI: https://doi.org/10.1007/3-540-37679-8_4
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-25650-2
Online ISBN: 978-3-540-37679-8
eBook Packages: Business and EconomicsEconomics and Finance (R0)