Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications - Second Edition - Hardcover

Gali, Jordi

Hardcover

ISBN 10: 0691164789 ISBN 13: 9780691164786

Verlag: Princeton University Press, 2015

Inhaltsangabe

The classic introduction to the New Keynesian economic model

This revised second edition of Monetary Policy, Inflation, and the Business Cycle provides a rigorous graduate-level introduction to the New Keynesian framework and its applications to monetary policy. The New Keynesian framework is the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. A backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, the framework provides the theoretical underpinnings for the price stability-oriented strategies adopted by most central banks in the industrialized world.

Using a canonical version of the New Keynesian model as a reference, Jordi Galí explores various issues pertaining to monetary policy’s design, including optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the effects on monetary policy are addressed, with emphasis on the desirability of inflation-targeting policies. New material includes the zero lower bound on nominal interest rates and an analysis of unemployment’s significance for monetary policy.

• The most up-to-date introduction to the New Keynesian framework available
• A single benchmark model used throughout
• New materials and exercises included
• An ideal resource for graduate students, researchers, and market analysts

Über diesen Titel

Über die Autorin bzw. den Autor

Jordi Gali is director and senior researcher at the Center for Research in International Economics (CREI). He is professor of economics at Pompeu Fabra University in Barcelona and research professor at the Barcelona Graduate School of Economics.

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Praise for the previous edition: "Jordi Galí provides an authoritative overview of the research that revolutionized monetary economics during the past decade, by embedding sticky prices in a coherent dynamic general equilibrium framework--thus providing a novel and much clearer positive and normative analysis of monetary policy. The presentation is elegant and intuitive, yet rigorous. The book will be a standard reference for graduate students, researchers, and policymakers. It is also highly recommended as a textbook for money/macro courses. Numerous useful exercises are provided."--Robert Kollmann, European Center for Advanced Research in Economics and Statistics, Free University of Brussels

Praise for the previous edition: "A state-of-the-art treatment of the emerging New Keynesian synthesis by one of the leaders in the field, Galí's book is a must-read for the next generation of macroeconomists."--N. Gregory Mankiw, Harvard University

Praise for the previous edition: "This is a wonderfully elegant and accessible introduction to the contemporary New Keynesian paradigm, written by one of the leading experts in the field. This monograph presents what one should know in a clean, cogent, and concise manner. I fully expect it to become a standard reference for both students and researchers in the field."--Mark Gertler, New York University

Praise for the previous edition: "This book provides an excellent introduction and exegesis of the New Keynesian model that is the current state of the art in the analysis of monetary policy. It will find a large audience with research economists, graduate students, and staffers in central banks around the world."--Philip R. Lane, Trinity College Dublin

Praise for the previous edition: "Systematic and concise. This is a fine book that is likely to become the key basic text for graduate courses on monetary policy."--Seppo Honkapohja, University of Cambridge

Praise for the previous edition: "Authoritative. This book will be very useful to graduate students and to others seeking an introduction to modern work in this area."--Michael Woodford, Columbia University

Aus dem Klappentext

Praise for the previous edition: "Jordi Gali provides an authoritative overview of the research that revolutionized monetary economics during the past decade, by embedding sticky prices in a coherent dynamic general equilibrium framework--thus providing a novel and much clearer positive and normative analysis of monetary policy. The presentation is elegant and intuitive, yet rigorous. The book will be a standard reference for graduate students, researchers, and policymakers. It is also highly recommended as a textbook for money/macro courses. Numerous useful exercises are provided."--Robert Kollmann, European Center for Advanced Research in Economics and Statistics, Free University of Brussels

Praise for the previous edition: "A state-of-the-art treatment of the emerging New Keynesian synthesis by one of the leaders in the field, Gali's book is a must-read for the next generation of macroeconomists."--N. Gregory Mankiw, Harvard University

Praise for the previous edition: "This is a wonderfully elegant and accessible introduction to the contemporary New Keynesian paradigm, written by one of the leading experts in the field. This monograph presents what one should know in a clean, cogent, and concise manner. I fully expect it to become a standard reference for both students and researchers in the field."--Mark Gertler, New York University

Praise for the previous edition: "This book provides an excellent introduction and exegesis of the New Keynesian model that is the current state of the art in the analysis of monetary policy. It will find a large audience with research economists, graduate students, and staffers in central banks around the world."--Philip R. Lane, Trinity College Dublin

Praise for the previous edition: "Systematic and concise. This is a fine book that is likely to become the key basic text for graduate courses on monetary policy."--Seppo Honkapohja, University of Cambridge

Praise for the previous edition: "Authoritative. This book will be very useful to graduate students and to others seeking an introduction to modern work in this area."--Michael Woodford, Columbia University"

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Monetary Policy, Inflation, and the Business Cycle

An Introduction to the New Keynesian Framework and its Applications

By Jordi Gali

PRINCETON UNIVERSITY PRESS

Copyright © 2015 Princeton University Press
All rights reserved.

ISBN: 978-0-691-16478-6

Contents

Preface, ix, 
Chapter 1 Introduction, 1, 
Chapter 2 A Classical Monetary Model, 17, 
Chapter 3 The Basic New Keynesian Model, 52, 
Chapter 4 Monetary Policy Design in the Basic New Keynesian Model, 98, 
Chapter 5 Monetary Policy Tradeoffs: Discretion versus Commitment, 126, 
Chapter 6 A Model with Sticky Wages and Prices, 163, 
Chapter 7 Unemployment in the New Keynesian Model, 199, 
Chapter 8 Monetary Policy in the Open Economy, 223, 
Chapter 9 Lessons, Extensions, and New Directions, 261, 
Index, 271, 

CHAPTER 1

INTRODUCTION

Over the past two decades, monetary economics has been among the most fruitful research areas within macroeconomics. The efforts of many researchers to understand the relationship among monetary policy, inflation, and the business cycle have led to the development of a framework—the so called New Keynesian model—that is widely used for monetary policy analysis. The present monograph offers an overview of that framework and a discussion of its policy implications.

The need for a framework that can help us understand the links between monetary policy and the aggregate performance of an economy seems self-evident. On the one hand, and in their condition as consumers, workers, or investors, citizens of modern societies have good reason to care about developments in inflation, employment, and other economywide variables, for those developments affect to an important degree their opportunities to maintain or improve their standard of living. On the other hand, monetary policy has an important role in shaping those macroeconomic developments, both at the national and supranational levels. Changes in interest rates have an influence on the valuation of financial assets and their expected returns, as well as on the consumption and investment decisions of households and firms. Those decisions can in turn have consequences for GDP growth, employment, and inflation. It is thus not surprising that the interest rate decisions made by the Fed, the ECB, or other prominent central banks around the world are given so much attention, not only by market analysts and the financial press, but also by the general public. It would thus seem important to understand how those interest rate decisions end up affecting the various measures of an economy's performance, both nominal and real. A key goal of monetary theory is to provide us with an account of the mechanisms through which those effects arise, that is, the transmission mechanism of monetary policy.

Central banks do not change interest rates in an arbitrary or whimsical manner. Their decisions are meant to be purposeful, that is, they seek to attain certain objectives, while taking as given the constraints posed by the workings of a market economy, in which the vast majority of economic decisions are made in a decentralized manner by a large number of individuals and firms. Understanding what should be the objectives of monetary policy and how the latter should be conducted in order to attain those objectives constitutes another important aim of modern monetary theory, in its normative dimension.

The following chapters present a framework that helps us understand both the transmission mechanism of monetary policy and the elements that come into play in the design of rules or guidelines for the conduct of monetary policy. The framework presented is, admittedly, highly stylized and should be viewed more as a pedagogical tool than a quantitative model that can be readily taken to the data. Nevertheless, and despite its simplicity, it contains the key elements (though not all the bells and whistles) found in the models being developed and used at central banks and other policy institutions.

The monetary framework that constitutes the focus of the present monograph has a core structure that corresponds to a Real Business Cycle (RBC) model, on which a number of "Keynesian features" are superimposed. Each of those two influences is briefly described next, in order to provide some historical background to the framework developed in subsequent chapters.

1.1 Background: Real Business Cycle Theory and Classical Monetary Models

During the years following the seminal papers of Kydland and Prescott (1982) and Prescott (1986), Real Business Cycle (RBC) theory provided the main reference framework for the analysis of economic fluctuations, and became to a large extent the core of macroeconomics. The impact of the RBC revolution had both a methodological and a conceptual dimension.

From a methodological point of view, RBC theory established firmly the use of dynamic stochastic general equilibrium (DSGE) models as a central tool for macroeconomic analysis. Behavioral equations describing aggregate variables were thus replaced by first order conditions of intertemporal problems facing consumers and firms. Ad hoc assumptions on the formation of expectations gave way to rational expectations. In addition, RBC economists stressed the importance of the quantitative aspects of modeling, as reflected in the central role given to the calibration, simulation, and evaluation of their models.

The most striking dimension of the RBC revolution was, however, conceptual. It rested on three basic claims:

• The efficiency of business cycles. Thus, the bulk of economic fluctuations observed in industrialized countries could be interpreted as an equilibrium outcome resulting from the economy's response to exogenous variations in real forces (most importantly, technology), in an environment characterized by perfect competition and frictionless markets. According to that view, cyclical fluctuations did not necessarily signal an inefficient allocation of resources (in fact, the fluctuations generated by the standard RBC model were fully optimal). That view had an important corollary: stabilization policies may not be necessary or desirable, and they could even be counterproductive. This was in contrast with the conventional interpretation, tracing back to Keynes (1936), of recessions as periods with an inefficiently low utilization of resources, which could be brought to an end by means of economic policies aimed at expanding aggregate demand.

• The importance of technology shocks as a source of economic fluctuations. That claim derived from the ability of the basic RBC model to generate "realistic" fluctuations in output and other macroeconomic variables, even when variations in total factor productivity—calibrated to match the properties of the Solow residual—are assumed to be the only exogenous driving force. Such an interpretation of economic fluctuations was in stark contrast with the traditional view of technological change as a source of long-term growth, unrelated to business cycles.

• The limited role of monetary factors. Most importantly, given the subject of the present monograph, RBC theory sought to explain economic fluctuations with no reference to monetary factors, even abstracting from the existence of a monetary sector.

Its strong influence among academic researchers notwithstanding, the RBC approach had a very limited impact (if any) on central banks and other policy institutions. The latter continued to rely on large-scale macroeconometric models despite the challenges to their usefulness for policy evaluation (Lucas (1976)) or the largely arbitrary identifying restrictions underlying the estimates of those models (Sims (1980)).

The attempts by Cooley and Hansen (1989) and others to introduce a monetary sector in an otherwise conventional RBC model, while sticking to the assumptions of perfect competition and fully flexible prices and wages, were not perceived as yielding a framework that was relevant for policy analysis. As discussed in chapter 2, the resulting framework, which we refer to as the classical monetary model, generally predicts neutrality (or near neutrality) of monetary policy with respect to real variables. That finding is at odds with the widely held belief (certainly among central bankers) in the power of that policy to influence output and employment developments, at least in the short run. That belief is underpinned by a large body of empirical work, tracing back to the narrative evidence of Friedman and Schwartz (1963), up to the more recent work using time series techniques, as described in Christiano, Eichenbaum, and Evans (1999).

In addition to the empirical challenges mentioned above, the normative implications of classical monetary models have also led many economists to call into question their relevance as a framework for policy evaluation. Thus, those models generally yield as a normative implication the optimality of the Friedman rule—a policy that requires that central banks keep the short-term nominal rate constant at a zero level—even though that policy seems to bear no connection whatsoever with the monetary policies pursued (and viewed as desirable) by the vast majority of central banks. Instead, the latter are characterized by (often large) adjustments of interest rates in response to deviations of inflation and indicators of economic activity from their target levels.

The conflict between theoretical predictions and evidence, and between normative implications and policy practice, can be viewed as a symptom that some elements that are important in actual economies may be missing in classical monetary models. As discussed below, those shortcomings are the main motivation behind the introduction of some Keynesian assumptions, while maintaining the RBC apparatus as an underlying structure.

1.2 The New Keynesian Model: Main Elements and Features

Despite their different policy implications, there are important similarities between the RBC model and the New Keynesian monetary framework. The latter, whether in the simple versions presented below or in its more complex extensions, has at its core some version of the RBC model. This is reflected in the assumption of (i) an infinitely lived representative household, who seeks to maximize the utility from consumption and leisure, subject to an intertemporal budget constraint, and (ii) a large number of firms with access to an identical technology, subject to exogenous random shifts. Though endogenous capital accumulation, a key element of RBC theory, is absent in the basic versions of the New Keynesian model, it is easy to incorporate and is a common feature of medium-scale versions. Also, as in RBC theory, an equilibrium takes the form of a stochastic process for all the economy's endogenous variables, consistent with optimal intertemporal decisions by households and firms, given their objectives and constraints, and with the clearing of all markets.

The New Keynesian modeling approach, however, combines the DSGE structure characteristic of RBC models with assumptions that depart from those found in classical monetary models. Here is a list of some of the key elements and properties of the resulting models:

• Monopolistic competition. Prices and/or wages are set by private economic agents in order to maximize their objectives, as opposed to being determined by an anonymous Walrasian auctioneer seeking to clear all markets.

• Nominal rigidities. Firms are subject to some constraints on the frequency with which they can adjust the prices of the goods they sell. Alternatively, they may face some costs of adjusting those prices. The same kind of friction applies to workers—or the unions that represent them—in the presence of sticky wages.

• Short-run non-neutrality of monetary policy. As a consequence of the presence of nominal rigidities, changes in short-term nominal interest rates (whether chosen directly by the central bank or induced by changes in the money supply) are not matched by one-for-one changes in expected inflation, thus leading to variations in real interest rates. The latter bring about changes in consumption and investment and, as a result, on output and employment, since firms find it optimal to adjust the quantity of goods supplied to the new level of demand. The same holds true for workers in the presence of sticky wages. In the long run, however, all prices and wages adjust, and the economy reverts back to its natural equilibrium, that is, the equilibrium that would prevail in the absence of nominal rigidities.

It is important to note that the three ingredients above were already central to the New Keynesian literature that emerged in the late 1970s and 1980s, and which developed in parallel with RBC theory. The models used in that literature, however, were often static or used reduced form equilibrium conditions that were not derived from explicit dynamic optimization problems facing firms and households. The emphasis of much of that work was instead on providing microfoundations, based on the presence of small menu costs, for the stickiness of prices and the resulting monetary non-neutralities. Other papers emphasized the persistent effects of monetary policy on output, and the role that staggered contracts played in generating that persistence. The novelty of the new generation of monetary models has been to embed those features in a fully specified DSGE framework, thus adopting the formal modeling approach that has been the hallmark of RBC theory.

Not surprisingly, important differences with respect to RBC models emerge in the new framework. First, the economy's response to shocks is generally inefficient. Second, the non-neutrality of monetary policy resulting from the presence of nominal rigidities makes room for welfare-enhancing interventions by the monetary authority, in order to minimize the existing distortions. Furthermore, those models are arguably suited for the analysis and comparison of alternative monetary regimes without being subject to the Lucas critique.

1.2.1 Evidence of Nominal Rigidities and Monetary Policy Non-Neutrality

The presence of nominal rigidities and the implied real effects of monetary policy are two distinctive ingredients of New Keynesian models. It would be hard to justify the introductions of those features in the absence of evidence in support of their relevance. Next we briefly describe some of that evidence and provide the reader with some relevant references.

1.2.1.1 EVIDENCE OF NOMINAL RIGIDITIES

Most attempts to uncover evidence on the existence and importance of price rigidities have generally relied on the analysis of micro data, that is, data on the prices of individual goods and services. In an early survey of that research, Taylor (1999) concludes that there is ample evidence of price rigidities, with the average frequency of price adjustment being about one year. In addition, he points to the very limited evidence of synchronization of price adjustments, thus providing some justification for the assumption of staggered price setting commonly found in the New Keynesian model. The study of Bils and Klenow (2004), based on the analysis of the average frequencies of price changes for 350 product categories underlying the U.S. CPI, called into question that conventional wisdom by uncovering a median duration of prices between 4 and 6 months. Nevertheless, more recent evidence by Nakamura and Steinsson (2008), using data on the individual prices underlying the U.S. CPI and excluding price changes associated with sales, has led to a reconsideration of the Bils-Klenow evidence, with an upward adjustment of the estimated median duration to a range between 8 and 11 months. Evidence for the euro area, discussed in Dhyne et al. (2006), points to a similar distribution of price durations to that uncovered by Nakamura and Steinsson for the United States. It is worth mentioning that, in addition to evidence of substantial price rigidities, most studies find a large amount of heterogeneity in price durations across sectors/types of goods, with services being associated with the largest degree of price rigidities, and unprocessed food and energy with the lowest.

The literature also contains several studies using micro data that provide analogous evidence of nominal rigidities for wages. Taylor (1999) contains an early survey of that literature and suggests an estimate of the average frequency of wage changes of about one year, the same as for prices. A significant branch of the literature on wage rigidities has focused on the possible existence of asymmetries that make wage cuts very rare or unlikely. Bewley's (1999) detailed study of firms' wage policies based on interviews with managers finds ample evidence of downward nominal wage rigidities. The multicountry study of Dickens et al. (2007) uncovers evidence of significant downward nominal and real wage rigidities in most of the countries in their sample. More recently, Barattieri et al. (2014) and Druant et al. (2012) use large survey-based data sets for the United States and euro area countries, respectively, and confirm the low frequency of wage adjustments, pointing to wage spells that on average last one year or longer.

1.2.1.2 EVIDENCE OF MONETARY POLICY NON-NEUTRALITIES

Monetary non-neutralities are, at least in theory, a natural consequence of the presence of nominal rigidities. As will be shown in chapter 3, if prices don't adjust in proportion to changes in the money supply (thus causing real balances to vary), or if expected inflation does not move one-for-one with the nominal interest rate when the latter varies (thus leading to a change in the real interest rate), the central bank will generally be able to alter the level aggregate demand and, as a result, the equilibrium levels of output and employment. Is the evidence consistent with that prediction of models with nominal rigidities? And if so, are the effects of monetary policy interventions sufficiently important quantitatively to be relevant?

(Continues...)

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Details zur Ausgabe

• Verlag: Princeton University Press
• Erscheinungsdatum: 2015
• Sprache: Englisch
• ISBN 10: 0691164789
• ISBN 13: 9780691164786
• Einband: Tapa dura
• Auflage: 2
• Anzahl der Seiten: 296
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar