DOCSLIB.ORG

Federal Reserve Bank of Minneapolis Money and Interest Rates (P. 2

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Federal Reserve Bank of Minneapolis Money and Interest Rates (P. 2 Federal Reserve Bank of Minneapolis Money and Interest Rates (p. 2) Cyril Monnet Warren E. Weber REPRINT] Some Monetary Facts (p. u) George T. McCandless Jr. Warren E. Weber Federal Reserve Bank of Minneapolis Quarterly Review Vol. 25, No. 4 ISSN 0271-5287 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Editor: Arthur J. Rolnick Associate Editors: Patrick J. Kehoe, Warren E. Weber Economic Advisory Board: Harold L. Cole, Russell W. Cooper, Thomas J. Holmes, Urban J. Jermann, Preston J. Miller Managing Editor: Kathleen S. Rolfe Article Editor: Kathleen S. Rolfe Production Editor: Jenni C. Schoppers Designer: Phil Swenson Typesetter: Mary E. Anomalay Circulation Assistant: Elaine R. Reed The Quarterly Review is published by the Research Department Comments and questions about the Quarterly Review may be " of the Federal Reserve Bank of Minneapolis. Subscriptions are sent to available free of charge. Quarterly Review Quarterly Review articles that are reprints or revisions of papers Research Department published elsewhere may not be reprinted without the written Federal Reserve Bank of Minneapolis permission of the original publisher. All other Quarterly Review P. O. Box 291 articles may be reprinted without charge. If you reprint an article, Minneapolis, Minnesota 55480-0291 please fully credit the source—the Minneapolis Federal Reserve (Phone 612-204-6455 / Fax 612-204-5515). Bank as well as the Quarterly Review—and include with the reprint a version of the standard Federal Reserve disclaimer Subscription requests may also be sent to the circulation (italicized above). Also, please send one copy of any publication assistant at [email protected]; editorial comments and that includes a reprint to the Minneapolis Fed Research questions, to the managing editor at [email protected]. Department. Electronic files of Quarterly Review articles are available through the Minneapolis Fed's home page on the World Wide Web: http://www.minneapolisfed.org. Federal Reserve Bank of Minneapolis Quarterly Review Fall 2001 Money and Interest Rates Cyril Monnet* Warren E. Weber* Economist Senior Research Officer Directorate General Research Research Department European Central Bank Federal Reserve Bank of Minneapolis Central banks routinely state monetary policies in terms ey. According to this view, money demand is a decreasing of interest rates. For example, in October 2001, the Euro- function of the nominal interest rate because the interest pean Central Bank stated that it had not changed interest rate is the opportunity cost of holding cash (liquidity). So rates recently because it considered current rates "consis- a decrease in the supply of money must cause interest rates tent with the maintenance of price stability over the me- to increase in order to keep the money market in equilibri- dium term" (ECB 2001, p. 5). In May 2001, Brazil's cen- um. We call this the liquidity effect view} tral bank "increased interest rates" because it was "worried Another view, which follows from the Fisher equation, about mounting inflationary pressure," according to the is that money and interest rates are positively related: in- New York Times (Rich 2001). And in the first half of 2000creasin, g interest rates requires an increase in the rate of the U.S. Federal Open Market Committee increased the money growth. The Fisher equation states that the nominal federal funds rate target three times in order to head off interest rate equals the real interest rate plus the expected "inflationary imbalances" (FR Board 2000). rate of inflation (Fisher 1896).2 If monetary policy does not Despite this common practice, central banks do not con- trol interest rates directly. They can target interest rates, but they can only attempt to hit those targets by adjusting other instruments they do control, such as the supply of bank *The authors thank Russ Cooper, Urban Jermann, and Art Rolnick for helpful dis- reserves. Changes in these instruments directly affect a cussions of earlier versions of this article. 1 The term liquidity effect as now used in the literature refers to the effect of un- country's stock of money, and financial market reactions expected changes in money growth rather than the effect of changes in the money to money supply changes are what actually change the stock. Nonetheless, since the origin of this idea is the interaction of money demand and supply, we use the term as a convenient label for the idea that money and interest rates level of interest rates. Clearly, in order to hit interest rate are negatively related. targets, central banks must have a reliable view about the 2The reasoning behind the Fisher equation is straightforward. Lenders (and bor- relationship between money supply changes and interest rowers) care about the number of units of goods they will get (or have to pay) for each unit of goods they lend (or borrow) today; this number is the real interest rate. How- rate changes. ever, loan contracts are written in terms of the number of dollars, not the goods, that Economic theory offers two seemingly contradictory the lenders (and borrowers) will receive (or pay) in the future; this number is the nom- inal interest rate. If the price of goods could never change over time, then real and views of this relationship. One view, which follows from nominal interest rates would be the same. But the price of goods can change. How the interaction of money demand and supply, is that money much the price of goods is expected to change between the time a loan is made and the time it is repaid is the expected rate of inflation. Since loan contracts take account and interest rates are negatively related: increasing interest of the expected inflation rate, adding that rate to the real interest rate converts rates of rates, for example, requires a decrease in the stock of mon- return in terms of goods to equivalent rates of return in terms of dollars. 2 Cyril Monnet, Warren E. Weber Money and Interest Rates affect the real interest rate (and errors in inflation expec- that have considered how a surprise change in the money tations are ignored), then the Fisher equation implies that supply—a so-called monetary policy shock—affects inter- higher nominal interest rates are associated with higher est rates. Although somewhat mixed, the empirical evi- rates of inflation. Since in the long run, high inflation rates dence on balance does support the liquidity effect conclu- are associated with high money growth rates, the Fisher sion that the money-interest rate relationship is negative. equation suggests that an increase in interest rates requires A surprise decrease in the money supply, for example, will an increase in the money growth rate. We call this the lead to increases in interest rates. Fisher equation view. In the second part of the study, we turn to economic These two views provide seemingly conflicting answers theory and present a simple model that incorporates both to the question of how a central bank should translate its views of the money-interest rate relationship. The model interest rate targets into actual changes in the money sup- allows money supply changes within a period to be accom- ply. One view implies that interest rates move in the op- panied by nominal interest rate changes in the opposite posite direction as the money supply; the other, that they direction, which is consistent with the liquidity effect view. move in the same direction. The model also allows the long-run average nominal in- This study presents empirical evidence as well as a sim- terest rate to move positively, percentage point for percent- ple model to explore this apparent conflict. The empirical age point, with the long-run average rate of money supply evidence supports both views of the relationship between growth, which is consistent with the Fisher equation view. changes in money and changes in interest rates. The model The model shows that how changes in the money supply shows that the two views are not, in fact, contradictory. affect interest rates depends both on what happens to the Which view applies at any particular point in time depends money stock today and on what is expected to happen to on when the central bank's change in money is to occur it in the future. If the money stock is unexpectedly changed and how long the public expects it to last. According to the today, but future money growth rates are expected to re- model, the nominal interest rate at any point in time is main unchanged, then interest rates move in the opposite determined by current and expected future money growth direction. But if the money stock is unexpectedly changed rates. A surprise increase in the current rate of money today and future money growth rates are expected to move growth, for example, causes the nominal interest rate to fall in the same direction, then interest rates move in that di- if the public expects the surprise increase to be temporary, rection too. that is, if their expectations for future money growth rates Finally, in the third part of the study, we shift from one are not increased as a result. However, if a surprise in- type of monetary policy to another. Up to this point, we crease in current money growth is interpreted by the public have assumed that the monetary policy is stated in terms of as permanent, then the nominal interest rate will rise. A the money supply. However, again, because most central surprise increase only in expected future money growth banks today state their policies in terms of interest rates, rates will also raise the nominal interest rate.
Load more

Recommended publications
  • Money in the Economy: a Post-Keynesian Perspective
    Money in the Economy: A post-Keynesian perspective Jo Michell, SOAS, University of London Fundamental Uncertainty • Originates in Keynes’ theory of probability • “non-ergodic” = distinction between known probability distribution (known unknowns) and unknowable future (unknown unknowns) • Risk and uncertainty • Conventions and animal spirits • Decisions on investment and saving “Is our expectation of rain, when we start out for a walk, always more likely than not, or less likely than not, or as likely as not? I am prepared to argue that on some occasions none of these alternatives hold, and that it will be an arbitrary matter to decide for or against the umbrella. If the barometer is high, but the clouds are black, it is not always rational that one should prevail over the other in our minds, or even that we should balance them, though it will be rational to allow caprice to determine us and to waste no time on the debate” (Keynes, Treatise on Probability) Money • Mechanism to cope with uncertainty • Three functions: store of value, unit of account, means of payment • Liquidity • Means to transfer purchasing power in order to meet contractual obligations • Contrast with Classical view: money as a means of transaction. Why hold money? “Money, it is well known, serves two principal purposes. By acting as a money of account it facilitates exchange without its being necessary that it should ever itself come into the picture as a substantive object. In this respect it is a convenience which is devoid of significance or real influence. In the second place, it is a store of wealth.
    [Show full text]
  • Short-Term Currency in Circulation Forecasting for Monetary Policy Purposes: the Case of Poland
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Koziński, Witold; Świst, Tomasz Article Short-term currency in circulation forecasting for monetary policy purposes: The case of Poland e-Finanse: Financial Internet Quarterly Provided in Cooperation with: University of Information Technology and Management, Rzeszów Suggested Citation: Koziński, Witold; Świst, Tomasz (2015) : Short-term currency in circulation forecasting for monetary policy purposes: The case of Poland, e-Finanse: Financial Internet Quarterly, ISSN 1734-039X, University of Information Technology and Management, Rzeszów, Vol. 11, Iss. 1, pp. 65-75, http://dx.doi.org/10.14636/1734-039X_11_1_007 This Version is available at: http://hdl.handle.net/10419/147121 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence.
    [Show full text]
  • Dangers of Deflation Douglas H
    ERD POLICY BRIEF SERIES Economics and Research Department Number 12 Dangers of Deflation Douglas H. Brooks Pilipinas F. Quising Asian Development Bank http://www.adb.org Asian Development Bank P.O. Box 789 0980 Manila Philippines 2002 by Asian Development Bank December 2002 ISSN 1655-5260 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. The ERD Policy Brief Series is based on papers or notes prepared by ADB staff and their resource persons. The series is designed to provide concise nontechnical accounts of policy issues of topical interest to ADB management, Board of Directors, and staff. Though prepared primarily for internal readership within the ADB, the series may be accessed by interested external readers. Feedback is welcome via e-mail ([email protected]). ERD POLICY BRIEF NO. 12 Dangers of Deflation Douglas H. Brooks and Pilipinas F. Quising December 2002 ecently, there has been growing concern about deflation in some Rcountries and the possibility of deflation at the global level. Aggregate demand, output, and employment could stagnate or decline, particularly where debt levels are already high. Standard economic policy stimuli could become less effective, while few policymakers have experience in preventing or halting deflation with alternative means. Causes and Consequences of Deflation Deflation refers to a fall in prices, leading to a negative change in the price index over a sustained period. The fall in prices can result from improvements in productivity, advances in technology, changes in the policy environment (e.g., deregulation), a drop in prices of major inputs (e.g., oil), excess capacity, or weak demand.
    [Show full text]
  • Measuring the Natural Rate of Interest: International Trends and Determinants
    FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Measuring the Natural Rate of Interest: International Trends and Determinants Kathryn Holston and Thomas Laubach Board of Governors of the Federal Reserve System John C. Williams Federal Reserve Bank of San Francisco December 2016 Working Paper 2016-11 http://www.frbsf.org/economic-research/publications/working-papers/wp2016-11.pdf Suggested citation: Holston, Kathryn, Thomas Laubach, John C. Williams. 2016. “Measuring the Natural Rate of Interest: International Trends and Determinants.” Federal Reserve Bank of San Francisco Working Paper 2016-11. http://www.frbsf.org/economic-research/publications/working- papers/wp2016-11.pdf 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. Measuring the Natural Rate of Interest: International Trends and Determinants∗ Kathryn Holston Thomas Laubach John C. Williams December 15, 2016 Abstract U.S. estimates of the natural rate of interest { the real short-term interest rate that would prevail absent transitory disturbances { have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies { Canada, the Euro Area, and the United Kingdom.
    [Show full text]
  • QE Equivalence to Interest Rate Policy: Implications for Exit
    QE Equivalence to Interest Rate Policy: Implications for Exit Samuel Reynard∗ Preliminary Draft - January 13, 2015 Abstract A negative policy interest rate of about 4 percentage points equivalent to the Federal Reserve QE programs is estimated in a framework that accounts for the broad money supply of the central bank and commercial banks. This provides a quantitative estimate of how much higher (relative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance. JEL classification: E52; E58; E51; E41; E43 Keywords: Quantitative Easing; Negative Interest Rate; Exit; Monetary policy transmission; Money Supply; Banking ∗Swiss National Bank. Email: [email protected]. The views expressed in this paper do not necessarily reflect those of the Swiss National Bank. I am thankful to Romain Baeriswyl, Marvin Goodfriend, and seminar participants at the BIS, Dallas Fed and SNB for helpful discussions and comments. 1 1. Introduction This paper presents and estimates a monetary policy transmission framework to jointly analyze central banks (CBs)’ asset purchase and interest rate policies. The negative policy interest rate equivalent to QE is estimated in a framework that ac- counts for the broad money supply of the CB and commercial banks. The framework characterises how standard monetary policy, setting an interbank market interest rate or interest on reserves (IOR), has to be adjusted to account for the effects of the CB’s broad money injection. It provides a quantitative estimate of how much higher (rel- ative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance.
    [Show full text]
  • Inflation, Income Taxes, and the Rate of Interest: a Theoretical Analysis
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Inflation, Tax Rules, and Capital Formation Volume Author/Editor: Martin Feldstein Volume Publisher: University of Chicago Press Volume ISBN: 0-226-24085-1 Volume URL: http://www.nber.org/books/feld83-1 Publication Date: 1983 Chapter Title: Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis Chapter Author: Martin Feldstein Chapter URL: http://www.nber.org/chapters/c11328 Chapter pages in book: (p. 28 - 43) Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis Income taxes are a central feature of economic life but not of the growth models that we use to study the long-run effects of monetary and fiscal policies. The taxes in current monetary growth models are lump sum transfers that alter disposable income but do not directly affect factor rewards or the cost of capital. In contrast, the actual personal and corporate income taxes do influence the cost of capital to firms and the net rate of return to savers. The existence of such taxes also in general changes the effect of inflation on the rate of interest and on the process of capital accumulation.1 The current paper presents a neoclassical monetary growth model in which the influence of such taxes can be studied. The model is then used in sections 3.2 and 3.3 to study the effect of inflation on the capital intensity of the economy. James Tobin's (1955, 1965) early result that inflation increases capital intensity appears as a possible special case.
    [Show full text]
  • Money Creation in the Modern Economy
    14 Quarterly Bulletin 2014 Q1 Money creation in the modern economy By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1) This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. Overview In the modern economy, most money takes the form of bank low and stable inflation. In normal times, the Bank of deposits. But how those bank deposits are created is often England implements monetary policy by setting the interest misunderstood: the principal way is through commercial rate on central bank reserves. This then influences a range of banks making loans. Whenever a bank makes a loan, it interest rates in the economy, including those on bank loans. simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the The reality of how money is created today differs from the economy may still be too low to be consistent with the description found in some economics textbooks: central bank’s monetary policy objectives.
    [Show full text]
  • Interest-Rate-Growth Differentials and Government Debt Dynamics
    From: OECD Journal: Economic Studies Access the journal at: http://dx.doi.org/10.1787/19952856 Interest-rate-growth differentials and government debt dynamics David Turner, Francesca Spinelli Please cite this article as: Turner, David and Francesca Spinelli (2012), “Interest-rate-growth differentials and government debt dynamics”, OECD Journal: Economic Studies, Vol. 2012/1. http://dx.doi.org/10.1787/eco_studies-2012-5k912k0zkhf8 This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. OECD Journal: Economic Studies Volume 2012 © OECD 2013 Interest-rate-growth differentials and government debt dynamics by David Turner and Francesca Spinelli* The differential between the interest rate paid to service government debt and the growth rate of the economy is a key concept in assessing fiscal sustainability. Among OECD economies, this differential was unusually low for much of the last decade compared with the 1980s and the first half of the 1990s. This article investigates the reasons behind this profile using panel estimation on selected OECD economies as means of providing some guidance as to its future development. The results suggest that the fall is partly explained by lower inflation volatility associated with the adoption of monetary policy regimes credibly targeting low inflation, which might be expected to continue. However, the low differential is also partly explained by factors which are likely to be reversed in the future, including very low policy rates, the “global savings glut” and the effect which the European Monetary Union had in reducing long-term interest differentials in the pre-crisis period.
    [Show full text]
  • Interest Rates and Expected Inflation: a Selective Summary of Recent Research
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Explorations in Economic Research, Volume 3, number 3 Volume Author/Editor: NBER Volume Publisher: NBER Volume URL: http://www.nber.org/books/sarg76-1 Publication Date: 1976 Chapter Title: Interest Rates and Expected Inflation: A Selective Summary of Recent Research Chapter Author: Thomas J. Sargent Chapter URL: http://www.nber.org/chapters/c9082 Chapter pages in book: (p. 1 - 23) 1 THOMAS J. SARGENT University of Minnesota Interest Rates and Expected Inflation: A Selective Summary of Recent Research ABSTRACT: This paper summarizes the macroeconomics underlying Irving Fisher's theory about tile impact of expected inflation on nomi­ nal interest rates. Two sets of restrictions on a standard macroeconomic model are considered, each of which is sufficient to iniplv Fisher's theory. The first is a set of restrictions on the slopes of the IS and LM curves, while the second is a restriction on the way expectations are formed. Selected recent empirical work is also reviewed, and its implications for the effect of inflation on interest rates and other macroeconomic issues are discussed. INTRODUCTION This article is designed to pull together and summarize recent work by a few others and myself on the relationship between nominal interest rates and expected inflation.' The topic has received much attention in recent years, no doubt as a consequence of the high inflation rates and high interest rates experienced by Western economies since the mid-1960s. NOTE: In this paper I Summarize the results of research 1 conducted as part of the National Bureaus study of the effects of inflation, for which financing has been provided by a grait from the American life Insurance Association Heiptul coinrnents on earlier eriiins of 'his p,irx'r serv marIe ti PhillipCagan arid l)y the mnibrirs Ut the stall reading Committee: Michael R.
    [Show full text]
  • An Assessment of Modern Monetary Theory
    An assessment of modern monetary theory M. Kasongo Kashama * Introduction Modern monetary theory (MMT) is a so-called heterodox economic school of thought which argues that elected governments should raise funds by issuing money to the maximum extent to implement the policies they deem necessary. While the foundations of MMT were laid in the early 1990s (Mosler, 1993), its tenets have been increasingly echoed in the public arena in recent years. The surge in interest was first reflected by high-profile British and American progressive policy-makers, for whom MMT has provided a rationale for their calls for Green New Deals and other large public spending programmes. In doing so, they have been backed up by new research work and publications from non-mainstream economists in the wake of Mosler’s work (see, for example, Tymoigne et al. (2013), Kelton (2017) or Mitchell et al. (2019)). As the COVID-19 crisis has been hitting the global economy since early this year, the most straightforward application of MMT’s macroeconomic policy agenda – that is, money- financed fiscal expansion or helicopter money – has returned to the forefront on a wider scale. Some consider not only that it is “time for helicopters” (Jourdan, 2020) but also that this global crisis must become a trigger to build on MMT precepts, not least in the euro area context (Bofinger, 2020). The MMT resurgence has been accompanied by lively political discussions and a heated economic debate, bringing fierce criticism from top economists including P. Krugman, G. Mankiw, K. Rogoff or L. Summers. This short article aims at clarifying what is at stake from a macroeconomic stabilisation perspective when considering MMT implementation in advanced economies, paying particular attention to the euro area.
    [Show full text]
  • A Primer on Modern Monetary Theory
    2021 A Primer on Modern Monetary Theory Steven Globerman fraserinstitute.org Contents Executive Summary / i 1. Introducing Modern Monetary Theory / 1 2. Implementing MMT / 4 3. Has Canada Adopted MMT? / 10 4. Proposed Economic and Social Justifications for MMT / 17 5. MMT and Inflation / 23 Concluding Comments / 27 References / 29 About the author / 33 Acknowledgments / 33 Publishing information / 34 Supporting the Fraser Institute / 35 Purpose, funding, and independence / 35 About the Fraser Institute / 36 Editorial Advisory Board / 37 fraserinstitute.org fraserinstitute.org Executive Summary Modern Monetary Theory (MMT) is a policy model for funding govern- ment spending. While MMT is not new, it has recently received wide- spread attention, particularly as government spending has increased dramatically in response to the ongoing COVID-19 crisis and concerns grow about how to pay for this increased spending. The essential message of MMT is that there is no financial constraint on government spending as long as a country is a sovereign issuer of cur- rency and does not tie the value of its currency to another currency. Both Canada and the US are examples of countries that are sovereign issuers of currency. In principle, being a sovereign issuer of currency endows the government with the ability to borrow money from the country’s cen- tral bank. The central bank can effectively credit the government’s bank account at the central bank for an unlimited amount of money without either charging the government interest or, indeed, demanding repayment of the government bonds the central bank has acquired. In 2020, the cen- tral banks in both Canada and the US bought a disproportionately large share of government bonds compared to previous years, which has led some observers to argue that the governments of Canada and the United States are practicing MMT.
    [Show full text]
  • Downward Nominal Wage Rigidities Bend the Phillips Curve
    FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Downward Nominal Wage Rigidities Bend the Phillips Curve Mary C. Daly Federal Reserve Bank of San Francisco Bart Hobijn Federal Reserve Bank of San Francisco, VU University Amsterdam and Tinbergen Institute January 2014 Working Paper 2013-08 http://www.frbsf.org/publications/economics/papers/2013/wp2013-08.pdf 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. Downward Nominal Wage Rigidities Bend the Phillips Curve MARY C. DALY BART HOBIJN 1 FEDERAL RESERVE BANK OF SAN FRANCISCO FEDERAL RESERVE BANK OF SAN FRANCISCO VU UNIVERSITY AMSTERDAM, AND TINBERGEN INSTITUTE January 11, 2014. We introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities. This is true for the both the long-run and the short-run Phillips curve. Comparing simulation results from the model with data on U.S. wage patterns, we show that downward nominal wage rigidities likely have played a role in shaping the dynamics of unemployment and wage growth during the last three recessions and subsequent recoveries. Keywords: Downward nominal wage rigidities, monetary policy, Phillips curve. JEL-codes: E52, E24, J3. 1 We are grateful to Mike Elsby, Sylvain Leduc, Zheng Liu, and Glenn Rudebusch, as well as seminar participants at EIEF, the London School of Economics, Norges Bank, UC Santa Cruz, and the University of Edinburgh for their suggestions and comments.
    [Show full text]