CAN MONETARY POLICY INFLUENCE LONG‐TERM INTEREST RATES? IT DEPENDS

Can monetary policy influence long‐term interest rates? Studies that have tackled this question using vector autoregressions (VARs) generally find that monetary policy's influence on long‐term interest rates is small and often statistically insignificant. Other studies, however, using a single‐equation approach, have found a robust relationship. Our study sheds new light on this question by estimating the effect of monetary policy shocks on long‐term interest rates in a VAR with long‐run monetary neutrality restrictions. We find that U.S. monetary policy can strongly influence long‐term interest rates, but only when the Federal Reserve has inflation‐fighting credibility and is able to firmly anchor inflationary expectations. (JEL E43, E51, E52)     

OPTIMAL MONETARY POLICY AND IMPERFECT FINANCIAL MARKETS: A CASE FOR NEGATIVE NOMINAL INTEREST RATES?

This article studies optimal monetary policy in a model with credit frictions and money demand. We show that augmenting a standard New Keynesian model with money demand and financial frictions generates a mechanism that, in equilibrium, gives rise to optimal negative nominal interest rates. In addition, we find that the tighter credit markets are, the lower the optimal nominal policy interest rate and the more likely it is to be negative. Quantitatively, when credit constraints are binding, a standard calibration of the model generates an optimal nominal policy interest rate that is roughly ?4% annually. (JEL E31, E41, E43, E44, E52, E58)     

EUROPEAN CENTRAL BANK FOOTPRINTS ON INFLATION FORECAST UNCERTAINTY

The finding of the paper shows the relative effectiveness of the “one size fits all” policy of the European Central Bank. The paper provides strong evidence in favor of this by testing whether the monetary policy effects (footprints) found in inflation uncertainty converge to a common level. These footprints are measured as the fraction of the estimated policy‐induced reduction in this uncertainty. The testing was conducted by applying a bootstrap‐type test in a regression of the rate of growth of these fractions on their initial values, computed for 16 euro area countries. (JEL C33, E52, E58)     

FORWARD GUIDANCE AND THE STATE OF THE ECONOMY

This paper analyzes forward guidance in a nonlinear model with a zero lower bound (ZLB) on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule, which capture innovations in expectations from central bank communication about future policy rates. Whereas most studies use quasi‐linear models that disregard the expectational effects of hitting the ZLB, we show how the effectiveness of forward guidance nonlinearly depends on the state of the economy, the speed of the recovery, the degree of uncertainty, the policy shock size, and the forward guidance horizon when households account for the ZLB. (JEL E43, E58, E61)     

MONETARY AND FISCAL POLICY DESIGN AT THE ZERO LOWER BOUND: EVIDENCE FROM THE LAB

The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation‐driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger‐than‐unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. (JEL E70, C92, D83, D84, E52, E62)     

INTERNATIONAL EFFECTS OF EURO AREA VERSUS U.S. POLICY UNCERTAINTY: A FAVAR APPROACH

Estimating a large‐scale factor‐augmented vector autoregressive model for 18 Organisation for Economic Co‐operation and Development member countries, we quantify the global effects of economic policy uncertainty shocks. More specifically, we check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a U.S. and a Euro area policy uncertainty shock. According to our results, an increase in economic policy uncertainty has a strong negative impact on economic activity (gross domestic product), consumer prices, equity prices, and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo‐Saxon countries. U.S. uncertainty shocks have a bigger impact than those for the Euro area. Economic policy uncertainty does not only affect that country where the shock originates but also has large cross‐border effects. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of national long‐term interest rates to an economic policy uncertainty shock, our results reveal a strong “North‐South” divide within the Euro area with rates decreasing less significantly in the South. Moreover, economic policy uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin. (JEL C32, F42, D80)     

STOP‐GO MONETARY POLICY

We propose and estimate several discrete choice models of monetary policy decision‐making that feature time‐varying inertia. The models permit us to account for three stylized facts characterizing monetary policymaking in the United States: (1) target interest rates are gradually adjusted in small discrete movements, (2) there are some long stretches of time in which rates are repeatedly moved, and (3) there are other long stretches in which the policy rate does not change. The models are used to account for delayed monetary policy responses to the recession of 2001 and to the housing‐driven expansion of 2003–2006. (JEL E52, E58, E65)     

ECONOMIES OF SCALE IN BANKING,INDETERMINACY, AND MONETARY POLICY

This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Financial intermediation is embedded into a standard flexible‐price monetary model, and provides deposits (inside money) that substitute with currency to purchase consumption. The results indicate that equilibrium indeterminacy does not depend on a large degree of ES in intermediation nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any positive degree of ES, while policies targeting nominal rates eliminate indeterminacy for all degrees of ES. (JEL C62, E44, E52)     

DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?

Central bankers and financial supervisors can have conflicting goals. While monetary policymakers work to ensure sufficient lending activities as a foundation for high and stable economic growth, supervisors may limit banks’ lending capacities in order to prevent excessive risk taking. We show that, in theory, central bankers can avoid this potential conflict by adopting an interest rate strategy that takes accounts of capital adequacy requirements. Empirical evidence suggests that while policymakers at the Federal Reserve have adjusted their interest rate to neutralizing the procyclical impact of bank capital requirements, those in Germany and Japan have not. (JEL E52, E58, G21)     

MANAGING RISK TAKING WITH INTEREST RATE POLICY AND MACROPRUDENTIAL REGULATIONS

We develop a model in which a financial intermediary's investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance, and characterize the policies that implement efficient risk taking. In the calibrated model, combining interest rate policy with state‐contingent macroprudential regulations—either capital or leverage regulation, and a tax on profits—achieves efficiency. Interest rate policy mitigates excessive risk taking by altering the return and the supply of collateralizable safe assets. In contrast to commonly used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates. (JEL E44, E52, G11, G18)     

FINANCIAL MARKET VARIABLES DO NOT PREDICT REAL ACTIVITY

The past decade has seen an extensive empirical reassessment of the information content of financial market variables sensitive to monetary policy. Particularly provocative are recent papers suggesting that some interest rates and interest rate spreads contain more information about economic activity than monetary aggregates. This paper reviews important methodological pitfalls in these studies. We then show that none of the commonly employed measures of monetary policy contain incremental information useful in forecasting real economic activity. Two conclusions are possible. Either monetary policy innovations have no significant real effects, or we (collectively) have failed in our efforts to measure monetary policy. ( JEL E52)     

Much ado about very little: The dubious connection between ethnic minority business policy and ethnic minority entrepreneurship

This article presents a historical reprise of 40 years of policy interest in ethnic minority businesses in the UK. It contrasts the pronouncements of policymakers with the reality of ethnic minority entrepreneurship. Such an exercise is surprisingly rare given the activism of policymakers in this arena and growing scholarly interest in this field. Our historical overview is informed by a novel research method that plots references to ethnic minority entrepreneurship in the British Houses of Parliament. Though the UK has been the site of some interesting policy experiments on ethnic minority entrepreneurship, their impact has been slight when set against the context of broader political-economic change.     

MONETARY POLICY REGIME SHIFTS: NEW EVIDENCE FROM TIME‐VARYING INTEREST RATE RULES

We estimate forward‐looking interest rate rules for five large Organization for Economic Cooperation and Development economies, allowing for time variation in the responses to macroeconomic conditions and in the variance of the policy rate. Conventional constant parameter reaction functions likely blur the impact of (1) model uncertainty, (2) conflicting objectives, (3) shifting preferences, and (4) nonlinearities of policymakers' choices. We find that monetary policies followed by the United States, the United Kingdom, Germany, France, and Italy are best summarized by feedback rules that allow for time variation in their parameters. Estimates point to sizeable differences in the actual conduct of monetary policies even in countries now belonging to the European Monetary Union. Moreover, our time‐varying parameter specification outperforms the conventional Taylor rule and generalized method of moment–based estimates of reaction functions in tracking the actual Fed funds rate. (JEL E52, E58, E60)     

STICKY PRICE AND STICKY INFORMATION PRICE‐SETTING MODELS: WHAT IS THE DIFFERENCE?

Using a partial equilibrium framework, Mankiw and Reis show that a sticky information model can generate a lagged and gradual inflation response after a monetary policy shock, whereas a sticky price model cannot. Our study demonstrates that the finding is sensitive to their model's parameterization. To determine a plausible parameterization, we specify a general equilibrium model with sticky information. In that model, we find that inflation peaks only one period after a monetary disturbance. A sensitivity analysis of our results reveals that the inflation peak is delayed by including real rigidities when the monetary policy instrument is money growth, whereas inflation peaks immediately when the policy instrument is the nominal interest rate. ( JEL E31, E32, E52)     

Interpersonal comparisons of utility and the policy paralysis problem

Several “Paretian” welfare rules are equivalent when policymakers know agents' characteristics, e.g., a policy is optimal if (a) any other policy making someone better off harms some agent, or (b) it is the maximum of some social welfare function. This paper extends these and other rules to environments where policymakers have a probability distribution over a state space of possible models. Under weak conditions, rule (a), which postulates ex ante preferences for agents, recommends some change from almost every status quo policy. Unfortunately, (a) requires a demanding form of interpersonal welfare comparability. Rule (b) labels all policies optimal if the state space obeys a weak diversity condition. Since the probabilities of states are irrelevant for this result, only a small perturbation of a model with no uncertainty generates policy paralysis. Received: 26 March 1997/Accepted: 16 November 1998     

INFERENCE USING QUALITATIVE AND QUANTITATIVE INFORMATION WITH AN APPLICATION TO MONETARY POLICY

I propose a framework for drawing inferences about an unobserved variable using qualitative and quantitative information. Using this framework, I study the timing and persistence of monetary policy regimes and compute probabilistic measures of the qualitative indicator's reliability. These estimates suggest that (1) it is over one and one-half times more likely that monetary policy is not restrictive at any point in time, (2) Boschen and Mills's [1995] policy index is a reliable indicator of the stance of monetary policy, and (3) certain qualitative indicators of monetary policy improve interest rate forecasts that are based on linear forecasting models. (JEL C22, E52)     

Doing Anti-Oppressive Practice: Building Transformative Politicized Social Work

Abstract

Evidence shows that children and young people with disability experience violence, abuse, and neglect at rates considerably higher than their peers. Despite persistent efforts to address it, these rates do not appear to be declining over time. As Australia moves towards implementing a national policy of personalised disability support, new opportunities and risks arise concerning personal safety in young people's lives. This paper reviews the existing evidence on abuse and neglect of children and young people with disability to help identify the nature of these risks and potential ways of thinking about and responding to these. Applying a social ecological lens, the discussion points to the importance of working productively with the multidimensional realities of these children's lives at a time when the policy and services designed to support them are also in a state of flux. The paper invites and challenges researchers, policymakers, and practitioners to engage critically with the knowledge already available and to question more deeply why abuse and neglect continue to diminish the lives of children and young people with disability.     

A LONG-RUN VIEW OF GERMAN DOMINANCE AND THE DEGREE OF POLICY CONVERGENCE IN THE EMS

A preliminary for European monetary union is convergence of the European Monetary System's members' policies. Using a cointegration framework with short-term interest rates and monetary bases as monetary policy measures, we find policy convergence has not occurred. Nor, contrary to popular belief, does the Bundesbank dominate other members' policies. Although the Bundesbank is influential, substantial policy interaction occurs among almost all the EMS countries examined. Finally, the "credibility" argument, that pegged exchange rate systems constrain and discipline monetary policymakers behavior, is undermined by our findings.     

MONETARY POLICY SHOCKS,EXPECTATIONS, AND INFORMATION RIGIDITIES

This paper contributes to the literature by assessing expectation effects from monetary policy for G7 economies. We rely on expectation data from Consensus Economics and a panel vector autoregression framework, which accounts for international spillovers and time‐variation. We analyze whether monetary policy has changed the degree of information rigidity after the emergence of the subprime crisis and estimate effects of interest rate changes on expectations, disagreements, and forecast errors. We find strong evidence for information rigidities and identify higher forecast errors by professionals after monetary policy shocks. Our results suggest that the international transmission of monetary policy shocks introduces noisy information and partly increases disagreement among forecasters. (JEL E31, E52)     

FISCAL STABILIZATION WITH PARTIAL EXCHANGE RATE PASS‐THROUGH

This article examines the role of fiscal stabilization policy in a two‐country framework that allows for partial exchange rate pass‐through. Analytical solutions for optimal monetary and fiscal policy rules depend on the degree of pass‐through. Each country unilaterally uses its fiscal instrument to stabilize the costs facing exporters. The welfare effects differ strongly depending on the degree of pass‐through. For high levels, both countries are better off with the fiscal instrument and welfare is closer to the benchmark flex‐price level. For low levels, however, the unilateral equilibrium policy rules lead to high volatility in taxes, and fiscal policy ends up being destabilizing by transmitting exchange rate fluctuations. Because these results stem from strategic considerations by the two countries, the fiscal instrument is not used under policy coordination. In addition, imposing a monetary union increases welfare when pass‐through is low, including the case of local currency pricing. (JEL E52, E63, F41, F42)