DOCSLIB.ORG

Lecture 11: Monetary/fiscal Interactions in the New Keynesian Model, Part One

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Lecture 11: Monetary/fiscal Interactions in the New Keynesian Model, Part One Monetary Economics Lecture 11: monetary/fiscal interactions in the new Keynesian model, part one Chris Edmond 2nd Semester 2014 1 This class Monetary/fiscal interactions in the new Keynesian model, part one • Fiscal policy and multipliers • Reading • Woodford “Simple analytics of the government expenditure ⇧ multiplier” AEJ: Macroeconomics,2011 Available from the LMS 2 This class 1- Benchmark fiscal multipliers – long-run multiplier (neoclassical case) – short-run multiplier (for constant real rate) 2- Detailed new Keynesian example – illustrates how multiplier depends on monetary policy reaction, price stickiness, etc 3 Neoclassical benchmark Household utility function • U(C) V (N) − Goods market • C + G = Y = F (N) Standard optimality conditions • V 0(N) W = = F 0(N) U 0(C) P Utility cost of producing Y output • 1 V 0(N) V˜ (Y ) V (F − (Y )), V˜ 0(Y )= ⌘ F 0(N) 4 Neoclassical benchmark (cont) Key optimality condition can then be written • U 0(Y G)=V˜ 0(Y ) − Implicitly differentiating and using U (C)=V˜ (Y ) gives • 0 0 U 00(C) dY U (C) U (C) Y = 00 = − 0 ˜ U (C) V˜ (Y ) dG U 00(C) V 00(Y ) 00 00 U (C) Y + ˜ Y − − 0 V 0(Y ) ⌘ = u (0, 1) ⌘u + ⌘v 2 where ⌘u > 0 and ⌘v > 0 are elasticities of U 0(C) and V˜ 0(Y ) with respect to Y 5 Imperfect competition Not much changes with constant markup • W " P = , MF (N) M⌘" 1 0 − Key condition can then be written • U 0(Y G)= V˜ 0(Y ) − M Again, implicitly differentiating and using U (C)= V˜ (Y ) gives • 0 M 0 dY ⌘ = u (0, 1) dG ⌘u + ⌘v 2 Constant markup reduces level of Y , but does not affect multiplier • 6 Aside: countercyclical markups? Suppose markup depends on output, (Y ). Multiplier formula • M then generalises to dY ⌘ = u dG ⌘u + ⌘m + ⌘v where ⌘m is elasticity of markup with respect to output Multiplier > 1 if markups sufficiently countercyclical, ⌘ < ⌘ • m − v Large literature provides microfoundations for countercyclical • markups. More generally, key is for endogenous decline in gap between real wage and household MRS 7 Short-run vs. long-run effects This neoclassical benchmark determines long-run multiplier • dY¯ ⌘ = u Γ (0, 1) dG¯ ⌘u + ⌘v ⌘ 2 [i.e., effects of permanent changes in government purchases] Consider government purchases G with permanent value G¯ • { t} What are the effects of transitory or short-run changes in G ? • t 8 Transitory change in Gt Multiplier effects depends on assumed monetary policy response.If • we want to “keep monetary policy unchanged”, what should we hold constant? Suppose monetary policy seeks to maintain a constant real interest • rate r = ⇢ = log β>0. Household consumption Euler equation t − then implies Ct = Ct+1 = C¯ for some level of consumption determined by the permanent level G¯ Hence for a purely transitory change • dYt Yt = C¯ + Gt, =1 dGt independent of details of wage or price stickiness! 9 Summary Long-run/neoclassical multiplier • dY¯ ⌘ = u Γ (0, 1) dG¯ ⌘u + ⌘v ⌘ 2 Short-run multiplier, holding real interest rate constant • dY t =1 dGt What if policy cannot maintain constant real rate? • – depends on details of monetary policy reaction, price stickiness etc – next, a simple new Keynesian example 10 Simple new Keynesian example Intertemporal consumption Euler equation • 1 ct = (it Et[⇡t+1] ⇢)+Et[ct+1] −σ − − Goods market, constant productivity • c + g = y = a +(1 ↵)n t t t − t Labor supply • w p = σc + 'n t − t t t Static markup (with flexible prices) • p = µ + w + n y log(1 ↵) t t t − t − − 11 Flexible price equilibrium Natural output, in log deviations • n yˆt =Γgˆt If measure G relative to Y¯ ,thatisgˆ (G G¯)/Y¯ , then this • t t ⌘ t − elasticity is the long-run multiplier, as above ⌘ σ Γ= u = ⌘u + ⌘v '+↵ σ + 1 ↵ − ⇣ ⌘ 12 Flexible price equilibrium (cont). Output gap • y˜ yˆ yˆn =ˆy Γgˆ =ˆc +(1 Γ)ˆg t ⌘ t − t t − t t − t Plug back into intertemporal consumption Euler equation to get dynamic IS curve 1 n y˜t = (it Et[⇡t+1] r )+Et[˜yt+1] −σ − − t Natural real rate [assuming gˆ process is AR(1)] • { t} rn = ⇢ + σ(1 Γ)(1 ⇢ )ˆg t − − g t 13 Simple new Keynesian example Dynamic IS curve • 1 n y˜t = (it Et[⇡t+1] r )+Et[˜yt+1] −σ − − t New Keynesian Phillips curve • ⇡t = βEt[⇡t+1]+y˜t Interest rate rule • it = ⇢ + φ⇡⇡t + φyy˜t Natural real rate • rn = ⇢ + σ(1 Γ)(1 ⇢ )ˆg t − − g t 14 Method of undetermined coefficients Guess • ⇡t = '⇡ggˆt, and y˜t = 'yggˆt for some coefficients '⇡g,'yg to be determined As usual, new Keynesian Phillips curve immediately implies • proportional relationship ' = ' ⇡g 1 ⇢ yg − g And from dynamic IS curve • (1 Γ)(1 ⇢ ) 1 ' = − − g , φ + (φ ⇢ ) > 0 yg +1 ⇢ ⌘ σ y 1 ⇢ ⇡ − g − g − g 15 Effects of increases in government purchases Output gap increases • @y˜t = 'yg > 0 @gˆt Inflation increases • @⇡t = '⇡g > 0 @gˆt Monetary policy tightens • @it = φ⇡'⇡g + φy'yg > 0 @gˆt 16 Multipliers redux Output then given by • 1 ⇢ + Γ yˆ =˜y +ˆyn =(' +Γ)g ˆ = − g gˆ t t t gy t 1 ⇢ + t − g (hence output [and employment] also increase) Since G is measured relative to Y¯ , this elasticity is also the new • t Keynesian multiplier Observe that • 1 ⇢ + Γ Γ < − g < 1 1 ⇢ + − g 17 Discussion Sticky prices imply a larger multiplier than classical benchmark • But multiplier still less than one • [interest rate rule here allows rt to vary] Size of multiplier increasing in degree of price stickiness • [high ✓ reduces which reduces and increases multiplier] Size of multiplier decreasing in monetary policy reactiveness • [high policy coefficients φ⇡,φy increase and reduce multiplier] Size of multiplier decreasing in persistence of gˆ shock • t 18 Discussion Larger multipliers obtain when monetary policy accommodates • fiscal expansion Important special case is when monetary policy is constrained by • the zero-lower-bound (ZLB) on it Can then have multipliers (substantially) larger than one • 19 Next class Monetary/fiscal interactions in the new Keynesian model, part two • The zero lower bound. Implications for multipliers. • Main reading: • Woodford “Simple analytics of the government expenditure ⇧ multiplier” AEJ: Macroeconomics,2011 Further reading • Christiano, Eichenbaum and Rebelo “When is the government ⇧ spending multiplier large?” Journal of Political Economy,2011 Available from the LMS 20.
Load more

Recommended publications
  • Unemployment Insurance and Macroeconomic Stabilization
    153 Unemployment Insurance and Macroeconomic Stabilization Gabriel Chodorow-Reich, Harvard University and the National Bureau of Economic Research John Coglianese, Board of Governors of the Federal Reserve System Abstract Unemployment insurance (UI) provides an important cushion for workers who lose their jobs. In addition, UI may act as a macroeconomic stabilizer during recessions. This chapter examines UI’s macroeconomic stabilization role, considering both the regular UI program which provides benefits to short-term unemployed workers as well as automatic and emergency extensions of benefits that cover long-term unemployed workers. We make a number of analytic points concerning the macroeconomic stabilization role of UI. First, recipiency rates in the regular UI program are quite low. Second, the automatic component of benefit extensions, Extended Benefits (EB), has played almost no role historically in providing timely, countercyclical stimulus while emergency programs are subject to implementation lags. Additionally, except during an exceptionally high and sustained period of unemployment, large UI extensions have limited scope to act as macroeconomic stabilizers even if they were made automatic because relatively few individuals reach long-term unemployment. Finally, the output effects from increasing the benefit amount for short-term unemployed are constrained by estimated consumption responses of below 1. We propose five changes to the UI system that would increase UI benefits during recessions and improve the macroeconomic stabilization role: (I) Expand eligibility and encourage take-up of regular UI benefits. (II) Make EB fully federally financed. (III) Remove look-back provisions from EB triggers that make automatic extensions turn off during periods of prolonged unemployment. (IV) Add additional automatic extensions to increase benefits during periods of extremely high unemployment.
    [Show full text]
  • The Microfoundations of the Multiplier Process
    The Microfoundations of the Multiplier Process Peter Howitt Brown University January 2, 2002 This is the Þrst draft of a paper to be presented at the ASSA meetings in the HES Session on “Keynes and General Equilibrium Theory,” Atlanta, January 4, 2002. 1Introduction The Keynesian multiplier process is the economist’s paradigmatic positive feedback loop. It causes an initial departure from full-employment equilibrium to cumulate instead of being corrected. The existence of some such process in actual economies is attested to by the typical hump-shaped impulse response pattern of GDP to a random shock in estimated times-series models. For example, Chari, Kehoe and McGrattan (1998) report that quarterly movements in the log of detrended US GDP are well approximated by the following AR2 process: yt =1.30yt 1 0.38yt 2 (1) − − − according to which a negative shock that reduces GDP by 1 percent this quarter is expected to reduced it by 1.3 percent next quarter, and by 1.31 percent the following quarter. The theoretical foundations of this process are not well understood. As originally pre- sented by Kahn and Keynes, and as still presented in undergraduate textbooks, it derives from a consumption function that links consumption to disposable income. Clower (1965) showed how such a link can arise in a Walrasian general equilibrium setting if price ad- justment takes place in real transaction time; when labor is in excess supply unemployed workers will not present their notional consumption demands to the auctioneer but will in- stead present demands that are constrained by realized sales income.
    [Show full text]
  • Congressional Record United States Th of America PROCEEDINGS and DEBATES of the 112 CONGRESS, FIRST SESSION
    E PL UR UM IB N U U S Congressional Record United States th of America PROCEEDINGS AND DEBATES OF THE 112 CONGRESS, FIRST SESSION Vol. 157 WASHINGTON, TUESDAY, DECEMBER 6, 2011 No. 186 House of Representatives The House met at 10 a.m. and was endured 125 years of change, growth, day, December 4, New York Times enti- called to order by the Speaker pro tem- and service. Today, Consumers Energy tled, ‘‘How the Food Industry Eats pore (Ms. FOXX). delivers electricity and natural gas to Your Kids’ Lunch.’’ This has serious f 6.8 million of Michigan’s 10 million consequences for the 32 million chil- residents in all 68 counties of the dren who rely on school lunches, and DESIGNATION OF SPEAKER PRO State’s Lower Peninsula. often the breakfast program as well. TEMPORE For the past 125 years, Consumer En- Unfortunately, when one-third of our The SPEAKER pro tempore laid be- ergy has operated under the timeless children of school age, 6 to 19, are over- fore the House the following commu- principle: provide customers with safe, weight or obese, this matters. nication from the Speaker: reliable, and affordable energy service. There’s no denying that the institu- WASHINGTON, DC, This principle has played an integral tional and political forces combine to December 6, 2011. role of improving the quality of life for favor giving our kids unhealthy food. It I hereby appoint the Honorable VIRGINIA generations of Michigan residents. It doesn’t just shortchange the children FOXX to act as Speaker pro tempore on this also has been responsible for the and their families with huge medical day.
    [Show full text]
  • Mpcs, Mpes, and Multipliers: a Trilemma for New Keynesian Models
    MPCs, MPEs, and Multipliers: A Trilemma for New Keynesian Models Adrien Auclert* Bence Bardóczy† Matthew Rognlie‡ March 2021 Abstract We show that New Keynesian models with frictionless labor supply face a challenge: given standard parameters, they cannot simultaneously match plausible estimates of marginal propen- sities to consume (MPCs), marginal propensities to earn (MPEs), and fiscal multipliers. A HANK model with sticky wages provides a solution to this trilemma. Introduction In recent decades, macroeconomics has experienced a micro-moment revolution. As the field has recognized the importance of heterogeneity for macroeconomic outcomes, it has increasingly used estimates from disaggregated data to discipline its models. One moment that epitomizes this revolution is the marginal propensity to consume (MPC): the amount by which consumption increases in response to a one-time transitory increase in income. Recent research has established that MPCs are extremely important for the macroeconomic effects of shocks and policy, both in partial equilibrium (e.g. Kaplan and Violante 2014, Auclert 2019, Berger, Guerrieri, Lorenzoni and Vavra 2018) and in general equilibrium (e.g. Kaplan, Moll and Violante 2018, Auclert, Rognlie and Straub 2018). Moreover, there exists a widespread consensus on the average level of MPCs in the data. We summarize this consensus as: Fact 1. Average MPCs are high in the data, around 0.25 quarterly and 0.5 annually. *Stanford University, CEPR and NBER. Email: [email protected]. †Northwestern University. Email: [email protected]. ‡Northwestern University and NBER. Email: [email protected]. An earlier version of this paper circulated under the title “A Note on Multipliers in NK Models with GHH Preferences”.
    [Show full text]
  • Congressional Record United States Th of America PROCEEDINGS and DEBATES of the 113 CONGRESS, SECOND SESSION
    E PL UR UM IB N U U S Congressional Record United States th of America PROCEEDINGS AND DEBATES OF THE 113 CONGRESS, SECOND SESSION Vol. 160 WASHINGTON, THURSDAY, JANUARY 9, 2014 No. 5 House of Representatives The House met at 10 a.m. and was the world, many of them trafficked for This January designated as National called to order by the Speaker pro tem- labor, but increasingly for underaged Slavery and Human Trafficking Pre- pore (Mr. MESSER). girls. For young women, this is a case vention Month is a perfect time to f where they are exploited in this traf- shine a spotlight on the dark issue of ficking as well. trafficking, but awareness is only a DESIGNATION OF SPEAKER PRO Even in my work as chairman of the first step. More needs to be done. TEMPORE Foreign Affairs Committee, I have To that end, I would urge my col- The SPEAKER pro tempore laid be- learned that human trafficking is no leagues to join me in cosponsoring H.R. fore the House the following commu- longer just a problem ‘‘over there.’’ It 3344, the Fraudulent Overseas Recruit- nication from the Speaker: is a problem in our communities here. ment and Trafficking Elimination Act, It is a problem in developing econo- to combat one critical form of recur- WASHINGTON, DC, ring abuse: namely, that is unscrupu- January 9, 2014. mies, but also it is a problem in the I hereby appoint the Honorable LUKE United States and in Europe. It is a lous recruiters. By targeting the re- MESSER to act as Speaker pro tempore on scourge even in the communities that cruiters we can do a lot—these recruit- this day.
    [Show full text]
  • Microfoundations
    TI 2006-041/1 Tinbergen Institute Discussion Paper Microfoundations Maarten Janssen Department of Economics, Erasmus Universiteit Rotterdam, and Tinbergen Institute. Tinbergen Institute The Tinbergen Institute is the institute for economic research of the Erasmus Universiteit Rotterdam, Universiteit van Amsterdam, and Vrije Universiteit Amsterdam. Tinbergen Institute Amsterdam Roetersstraat 31 1018 WB Amsterdam The Netherlands Tel.: +31(0)20 551 3500 Fax: +31(0)20 551 3555 Tinbergen Institute Rotterdam Burg. Oudlaan 50 3062 PA Rotterdam The Netherlands Tel.: +31(0)10 408 8900 Fax: +31(0)10 408 9031 Please send questions and/or remarks of non- scientific nature to [email protected]. Most TI discussion papers can be downloaded at http://www.tinbergen.nl. MICROFOUNDATIONS Maarten C.W. Janssen1 Erasmus University Rotterdam and Tinbergen Institute Abstract. This paper gives an overview and evaluates the literature on Microfoundations. Key Words: Representative Agents, New Keynesian Economics, and New Classical Economics JEL code: B22, D40, E00 1 Correspondence Address: Erasmus University Rotterdam and Tinbergen Institute, Postbus 1738, 3000 DR Rotterdam, The Netherlands, e-mail: [email protected]. This paper is prepared as an entry for The New Palgrave Dictionary of Economics (3rd edition) that is currently being prepared. I thank the editors, Steven Durlauf and David Easley, for comments on an earlier version. 1 The quest to understand microfoundations is an effort to understand aggregate economic phenomena in terms of the behavior of
    [Show full text]
  • The Keynesian Multiplier, Credit-Money and Time∗
    The Keynesian Multiplier, Credit-Money and Time∗ Sebastian Gechert†‡ October 19, 2011 Abstract. We analyze whether the standard serial multiplier is con- sistent with an endogenous credit-money framework and whether it is applicable to time series data. In order to integrate these terms, we draw on the velocity multiplier approach and a reformulation of the sources and uses of funds in the standard multiplier process. We ar- gue that both the standard multiplier and the velocity multiplier are incomplete; however, they can benefit from each other. Their useful properties are integrated to a new version of the multiplier drawing on the income propagation period and a distinction between saving in terms of debt settlement and saving in terms of accumulating receiv- ables. While the comparative-static stability condition can be dropped, our integrated multiplier reveals a dynamic stability condition for the multiplier process. Keywords. Keynesian multiplier; endogenous money; velocity of money; credit cycles JEL classification. B22, E12, E51, E62 1 Introduction The discussion of fiscal multipliers has lasted for decades and still economists struggle on the value of the multiplier. Stimulus packages facing the great reces- ∗Preliminary draft—not to be cited without author’s permission. †Chemnitz University of Technology, Department of Economics & BA, Germany. [email protected] ‡I would like to thank the participants of the KIEnet conference in Roskilde 2011, those of the 6th Meeting of the Keynes Society in Izmir 2011, and those of the 14th FMM conference in Berlin 2010 for their helpful comments. Of course, they bear no responsibility for any mistakes.
    [Show full text]
  • Congressional Record United States Th of America PROCEEDINGS and DEBATES of the 112 CONGRESS, FIRST SESSION
    E PL UR UM IB N U U S Congressional Record United States th of America PROCEEDINGS AND DEBATES OF THE 112 CONGRESS, FIRST SESSION Vol. 157 WASHINGTON, THURSDAY, FEBRUARY 10, 2011 No. 21 House of Representatives The House met at 10 a.m. and was The Lillian Trasher Orphanage, loudest voice on the field because called to order by the Speaker pro tem- begun in 1911 by an American from that’s the kind of person that she is. pore (Mr. CHAFFETZ). Jacksonville, Florida, is one of the old- She is passionate, she is fierce in her f est and longest-serving charities in the dedication to her friends, and she has world. It currently serves over 600 chil- devoted her entire life to making her DESIGNATION OF SPEAKER PRO dren, along with widows and staff. This community, her State, and her country TEMPORE pillar of the community has been home a better place for all Americans. The SPEAKER pro tempore laid be- to thousands of children who needed Bev recently had a curveball thrown fore the House the following commu- food, shelter, and a family. Orphanage at her when she was diagnosed with nication from the Speaker: graduates serve around the world as amyotrophic lateral sclerosis, also WASHINGTON, DC, bankers, doctors, pastors, teachers, and known as ALS—Lou Gehrig’s Disease. February 10, 2011. even in the U.S. Government. Bev has always taken life head-on, and I hereby appoint the Honorable JASON Despite many challenges over the that’s how she addressed this chal- CHAFFETZ to act as Speaker pro tempore on years, the wonderful staff, now led by lenge, the same way she has lived her this day.
    [Show full text]
  • Congressional Record United States Th of America PROCEEDINGS and DEBATES of the 112 CONGRESS, FIRST SESSION
    E PL UR UM IB N U U S Congressional Record United States th of America PROCEEDINGS AND DEBATES OF THE 112 CONGRESS, FIRST SESSION Vol. 157 WASHINGTON, TUESDAY, DECEMBER 6, 2011 No. 186 House of Representatives The House met at 10 a.m. and was endured 125 years of change, growth, day, December 4, New York Times enti- called to order by the Speaker pro tem- and service. Today, Consumers Energy tled, ‘‘How the Food Industry Eats pore (Ms. FOXX). delivers electricity and natural gas to Your Kids’ Lunch.’’ This has serious f 6.8 million of Michigan’s 10 million consequences for the 32 million chil- residents in all 68 counties of the dren who rely on school lunches, and DESIGNATION OF SPEAKER PRO State’s Lower Peninsula. often the breakfast program as well. TEMPORE For the past 125 years, Consumer En- Unfortunately, when one-third of our The SPEAKER pro tempore laid be- ergy has operated under the timeless children of school age, 6 to 19, are over- fore the House the following commu- principle: provide customers with safe, weight or obese, this matters. nication from the Speaker: reliable, and affordable energy service. There’s no denying that the institu- WASHINGTON, DC, This principle has played an integral tional and political forces combine to December 6, 2011. role of improving the quality of life for favor giving our kids unhealthy food. It I hereby appoint the Honorable VIRGINIA generations of Michigan residents. It doesn’t just shortchange the children FOXX to act as Speaker pro tempore on this also has been responsible for the and their families with huge medical day.
    [Show full text]
  • Explain How the Federal Reserve and the Banking System Create Money (I.E., the Supply of Money) Explain the Factors That Affect the Demand for Money.”
    Macroeconomics Topic 6: “Explain how the Federal Reserve and the banking system create money (i.e., the supply of money) Explain the factors that affect the demand for money.” Reference: Gregory Mankiw’s Principles of Macroeconomics, 2nd edition, Chapter 15. The Banking System and the Money Supply The Federal Reserve System, also known simply as the Fed, is the central bank of the United State. The Fed has several important functions such as, supplying the economy with currency, holding deposits of banks, lending money to banks, regulating the money supply and supervising the banking system. Most modern economies are based on a fractional-reserve banking system. Fractional reserve banking is designed to assure that banks have enough liquid assets (reserves) on hand to satisfy the normal withdrawals made from checking account deposits. Actual Bank Reserves = Bank deposits held at the Fed. + Bank Vault Cash. Both of these assets are readily available to satisfy customer withdrawals or transfer to other banks as customers write checks. The Fed. establishes a Required Reserve Ratio which is the percentage of checkable account deposits that the banks are required to hold as reserves. Thus the Minimum required reserves = Required Reserve Ratio X Checkable deposits. Money Creation with Fractional-Reserve Banking The money supply is made up of the currency in circulation outside of banks, and the level of checkable deposits in the banking system. To see how banks create money, lets assume we have an economy without a banking system and this economy has $1000 in currency, so the total money supply is $1000. Now suppose someone opens a bank called First Local Bank (FLB) and people in this economy deposit all the money they have at FLB.
    [Show full text]
  • Understanding the Size of the Government Spending Multiplier: It's in the Sign
    FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Understanding the Size of the Government Spending Multiplier: It's in the Sign Regis Barnichon, Federal Reserve Bank of San Francisco and CEPR Davide Debortoli Universitat Pompeu Fabra, CREi, Barcelona GSE and CEPR Christian Matthes Indiana University September 2020 Working Paper 2021-01 https://www.frbsf.org/economic-research/publications/working-papers/2021/01/ Suggested citation: Barnichon, Regis, Davide Debortoli, Christian Matthes. “Understanding the Size of the Government Spending Multiplier: It's in the Sign,” Federal Reserve Bank of San Francisco Working Paper 2021-01. https://doi.org/10.24148/wp2021-01 The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Understanding the Size of the Government Spending Multiplier: It's in the Sign∗ Regis Barnichon(a) Davide Debortoli(b) Christian Matthes(c) (a) Federal Reserve Bank of San Francisco and CEPR (b) Universitat Pompeu Fabra, CREi, Barcelona GSE and CEPR (c) Indiana University September 3, 2020 Abstract This paper argues that an important, yet overlooked, determinant of the government spending multiplier is the direction of the fiscal intervention. Regardless of whether we identify government spending shocks from (i) a narrative approach, or (ii) a timing restric- tion, we find that the contractionary multiplier |the multiplier associated with a negative shock to government spending| is above 1 and largest in times of economic slack. In con- trast, the expansionary multiplier |the multiplier associated with a positive shock| is substantially below 1 regardless of the state of the cycle.
    [Show full text]
  • The Phillips Multiplier Régis Barnichon Geert Mesters This Version: April 2019 (January 2019)
    The Phillips Multiplier Régis Barnichon Geert Mesters This version: April 2019 (January 2019) Barcelona GSE Working Paper Series Working Paper nº 1070 The Phillips Multiplier∗ Regis Barnichonpaq and Geert Mesterspbq p q a Federal Reserve Bank of San Francisco and CEPR p q b Universitat Pompeu Fabra, Barcelona GSE April 30, 2019 Abstract We propose a methodology for determining the inflation-unemployment trade-off faced by a central bank, i.e., the ability of a central bank to transform unemployment into in- flation (and vice versa) via its interest rate policy. We introduce the Phillips multiplier as a statistic to non-parametrically characterize the trade-off and its dynamic nature. Inference on the Phillips multiplier is based on a simple instrumental variable regres- sion of cumulative inflation on cumulative unemployment using monetary shocks as instruments and weak instrument robust methods. We compute the Phillips multiplier for the US and the UK and document that the trade-off went from being very large in the pre-1990 sample period to being small (but significant) post-1990. In contrast to earlier evidence of a substantial flattening of the slope of Phillips curve, we find that the decline in the trade-off is mostly due to the anchoring of inflation expectations. JEL classification: C14, C32, E32, E52. Keywords: Inflation-Unemployment trade-off, Dynamic Multiplier, Instrumental vari- ables, Phillips curve. ∗First draft: February 2018. We thank Oscar Jorda, Sylvain Leduc, Nicolas Petrosky-Nadeau, Frank Schorfheide, Adam Shapiro, Jim Stock, Paolo Surico, Mark Watson, Dan Wilson and participants at the 2018 Annual SNDE Symposium, the 2018 IAAE Annual Meeting, the 2018 NBER Summer Institute and the CEPR \Low Inflation and Wage Dynamics: Implications for Monetary Policy and Financial Stability conference at Banca Italia for helpful comments.
    [Show full text]