THE FISCAL FRAMEWORK OF MONETARY POLICY

This paper i11ustrates the importance of the fiscal framework for monetary analysis by discussing three separate issues. I begin by examining how the fiscal framework changes the macroeconomic equilibrium associated with different steady state rates of money growth. This includes a summary of research that I have presented elsewhere and comments on several additional aspects of the way in which the fiscal structure destroys the neutrality of monetary policy.
The second section deals with the short-run impact of changes in monetary policy. Here again the fiscal structure complicates the economy's response to monetary policy.
The final section looks at the effect of the fiscal structure on the central banks choice of monetary policies. Fiscal structures are likely to influence the policies adopted because they affect the costs and benefits of monetary policies.     

WHO IS AFRAID OF THE FRIEDMAN RULE?

We explore the connection between optimal monetary policy and heterogeneity among agents in a standard monetary economy with two types of agents where the stationary distribution of money holdings is nondegenerate. Sans type-specific fiscal policy, we show that the zero-nominal-interest rate policy (the Friedman rule) does not maximize type-specific welfare; it may not maximize aggregate ex ante social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. ( JEL E31, E51, E58)     

CENTRAL BANK REPUTATION AND THE MONETIZATION OF DEFICITS: THE 1981 ITALIAN MONETARY REFORM

In 1981 the Bank of Italy was freed from the obligation to purchase the unsold public debt at the Treasury auctions. Since then, the Bank of Italy has reduced debt monetization. The paper seeks to explain this policy shift by analyzing a game between the monetary and fiscal authorities. The fiscal authority is imperfectly informed about the central bank preferences. An equilibrium exists in which the central bank does not monetize, so as to establish a reputation of being independent. Monetization raises fiscal deficits and may raise public debt relative to a non-accommodative policy.     

THE INTEREST ELASTICITY OF MONEY DEMAND, LIQUIDITY AND REVERSE CAUSATION

This paper employs theoretical neoclassical and Keynesian models which have been expanded to include near monies to demonstrate that the interest elasticity of money demand is a peripheral issue to more fundamental differences between monetarists and Keynesians. The analysis indicates that the money supply is endogenously determined by income in such models, i.e. the reverse causation argument applies, and money is therefore an inappropriate instrument of monetary policy. The analysis also reveals that necessary and sufficient conditions for fiscal policy to be impotent are that the interest elasticities of money demand, money supply and all near monies must be zero.     

THE STATE OF THE FEDERAL BUDGET AND THE STATE OF THE ECONOMY

This paper tests systematic responses of the Federal budget to forecasts of inflation and unemployment. Estimated coefficients from fiscal policy reaction functions are examined to determine whether there are such systematic responses. Additionally, the coefficients of these estimated fiscal policy reaction functions are used to test several hypotheses concerning fiscal policy which have been advanced in the political business cycle and public choice literatures.     

THE REACTION OF INTEREST RATES TO UNANTICIPATED FEDERAL RESERVE ACTIONS AND STATEMENTS: IMPLICATIONS FOR THE MONEY ANNOUNCEMENT CONTROVERSY

This paper examines the reaction of long- and short-term interest rates to monetary policy surprises that influenced market expectations of the future behavior of the federal funds rate in the period after October 1979. We find that the relative reaction of long- and short-term rates to policy surprises is similar to the relative reaction of these rates to money announcements. Consequently, we conclude that the large reaction of long-term interest rates to money announcements in the period after October 1979 is consistent with the "policy anticipations hypothesis" which views this reaction as a movement in real interest rates.     

RULES AND DISCRETION WITH NONCOORDINATED MONETARY AND FISCAL POLICIES

The time inconsistency of optimal monetary policy is due to the effects of tax distortions. Thus the issue of how to improve upon the time-consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy. We present a model with three players (the central bark, the fiscal authority, and wage setters) in which distortionary taxes are explicitly modelled. We show that binding commitments to monetary rules are not necessarily welfare improving if monetary and fiscal policy are not coordinated. We also examine the effects of different degrees of independence of the central bank.     

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)     

THE RELATION BETWEEN NARRATIVE AND MONEY MARKET INDICATORS OF MONETARY POLICY

This paper studies the relation between narrative-based indicators of monetary policy and widely used money market indicators of monetary policy. Three principal findings emerge. First, changes in monetary policy, as measured by the narrative-based policy indices, are associated with persistent changes in the levels of M2 and the monetary base. In contrast, changes in the narrative policy indicators lead to transitory changes in short-term interest rates, nonborrowed reserves, and the spread between the six-month commercial paper rate and the three-month treasury bill rate. Third, these findings are generally robust across different narrative-based policy indices.     

EXCHANGE RATE REGIMES AND FISCAL DISCIPLINE: THE ROLE OF CAPITAL CONTROLS

How do exchange rate regimes influence fiscal discipline? This important question has typically been addressed exploiting the classic dichotomy of fixed versus flexible exchange rate regimes assuming perfect capital mobility. However, the role of capital controls cannot be neglected, particularly in developing countries. This paper analyzes the effects of capital controls on fiscal performance by focusing on dual exchange rate regimes. In a model in which the fiscal policy is endogenously determined by a nonbenevolent fiscal authority, dual regimes induce politicians to have higher fiscal deficits than under fixed and flexible regimes operating under perfect capital mobility. The model also shows this effect increases as fiscal authorities become more impatient. Dynamic panel regressions confirm that dual regimes lead to higher fiscal deficits than fixed and flexible regimes operating under unified rates. Using a dummy for pre‐electoral year as an indicator of fiscal authorities' shortsightedness, we also confirm that dual exchange rate has a more adverse effect on fiscal deficits as the authorities become more impatient. (JEL E50, E60, F31, F41)     

中国经济运行“新常态”解析

近3年,中国经济整体运行有以下特征：经济增速是中高速的,且有小幅波动,就业基本平衡,低水平通胀,出现局部性金融风险,管理部门出台了有限度的经济刺激政策.但目前,中国经济运行主要有以下风险：持续通缩,房地产投资增速回落,市场违约风险显性化,联保联贷的风险.要维持经济新的运行状态,货币政策应保持宽松的基调不变,但要使资金进入实体经济,财政政策可更积极一些,尤其是要关注小微企业.     

THE VANISHING LIQUIDITY EFFECT OF MONEY ON INTEREST: ANALYSIS AND IMPLICATIONS FOR POLICY

This paper seeks to re-examine the effects of money on interest rates. The earlier literature on this topic determined, fairly well, the pattern of response of interest rates to changes in money growth. The notable studies of Cagan (1972), Cagan and Gandolfi (1969), and Gibson (1970) served to establish the professions "stylized pattern" as presented in section I. Section II presents new evidence on the subject and finds that the old empirical generalizations no longer hold. Specifically, the results suggest that the initial liquidity effect of faster money growth is likely to be offset within the month following the monetary policy change. Sections III and IV investigate the reasons for the changing pattern of monetary effects on interest rates and discuss the policy implications of the new pattern.     

THE LONG-RUN LINK BETWEEN MONEY GROWTH AND INFLATION

Is inflation always a monetary phenomenon? Many economists believe that the link between money growth and inflation in the U.S. has weakened over the last two decades due in part to the Federal Reserve's policy experiment in 1979–1982 and innovations in the financial sector of the economy. I find that the long-run relationship between money growth and inflation is strong in a statistical sense and important economically. The key result is that the trend or growth component in CPI inflation is entirely due to the trend component of monetary base growth. (JEL C32, E31, E51)     

THE CHANGING INFLUENCE OF MONEY AND MONETARY POLICY ON EXCHANGE RATES

This paper focuses on an old issue—the linkage between money announcements and the exchange rate. It shows that the magnitude of the time-varying response of the spot exchange rate to an unanticipated money announcement is mainly driven by agents' expectations of the Federal Reserve's time-varying response to the deviation of the actual money supply from a prespecified target. The inference is, the magnitude of the exchange rate's response to economic announcements depends on market participants' expectations about the announcements and the Fed's probable monetary policy response.     

The capitalization of knowledge

Conclusion The United States economic crisis of the past decade has precipitated a debate over future economic strategy. The alternative positions are whether it is better to try to save old industries or develop new ones. Nevertheless, worker control of firms through Employee Stock Ownership Plans (ESOP's) and state government investment in new high-tech companies have one thing in common. They both represent a turn toward the microeconomic level of firms in influencing economic policy rather than the traditional macroeconomic level of monetary or fiscal policy.However the Reagan administration continued the federal tradition established during the Roosevelt era of influencing the economy on the macroeconomic level. This squelched the move toward a microeconomic industrial policy that was emerging toward the end of the Carter administration. Responsibility for industrial policy, never explicitly assumed by the federal government, is currently being assumed by state governments. Support for science, a responsibility the federal government assumed during the post-war era, is currently being undertaken by the states to address economic development needs.During the Reagan era, as the federal government continued to focus on macroeconomic policies, state governments created microeconomic policies designed to renew regional industrial infrastructures. The various state government initiatives oriented toward developing new technology for civilian purposes assumed responsibility for industrial and science policy. It is noteworthy that these programs for shaping the relations among science, technology, and economic development have been supported by governors and legislators across the political spectrum. Perhaps ironically, a national consensus on industrial and science policy has been achieved, but implementation has been largely limited to the regional level. Given the broad base of support for state science/ industry initiatives it is reasonable to predict that it will become national policy in some form as a new generation takes political leadership on the federal level in the post-Reagan era. Perhaps in the future we shall see a reprise of what happened during the depression when the Roosevelt administration inaugurated, on a larger scale, programs that Wisconsin and New York had pioneered during the Progressive era.     

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)     

THE EMPIRICAL DEFINITION OF MONEY: A CRITIQUE

Money talks, but it does not give itself away. Lately there has been much talk about money, and even less agreement than heretofore about what it is. Because of the growing immateriality of money, the difficulty of defining it has waxed rather than waned with increased knowledge. This, of course, has not made the development of monetary theory or the determination of monetary policy any easier. Milton Friedman and Anna Jacobson Schwartz (hereafter referred to as F-S) prefer an empirical definition of money to a priori definitions, such as the generally acceptable means of payment.1 However, they fail to demonstrate either that complete freedom from a priori conceptualization is possible or that such procedure can avoid circularity of reasoning.2 If there is no "right" definition of money (F-S, 1970, pp. 137, 145–146, 151, 197–198), there is no "empirical" definition in the absence of the "right" monetary theory.     

THE SUCCESS OF THE FED AND THE DEATH OF MONETARISM

We propose an explanation for the demise of monetarism in the United States. We show that optimal monetary policy would lead to zero correlation between monetary aggregates and inflation if the effect of monetary aggregates on inflation is known precisely and to negative correlations if there is coefficient uncertainty. From 1960 to 1982 the correlation of the monetary base and inflation was positive and so the variance in the growth rate of monetary base in the United States was clearly too large monetary base growth destabilized inflation. However, from 1983 to 2003 variations in monetary base growth were clearly stabilizing and could have been just right. ( JEL E52, E31, E32)     

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)     

THE OPTIMAL MONETARY RESPONSE TO TECHNOLOGY SHOCKS

This paper develops a model in which both technology and monetary shocks are important sources of variation in aggregate output and employment. The model rationalizes a policy under which money responds actively to technology shocks. The welfare cost of adopting the constant money growth rule advocated by Milton Friedman rather than the optimal activist policy is small, however. (JEL E52, E32)