Aaron L. Jackson

Quantitative goals for monetary policy: a quantile regression approach

A recent paper by Fatas et al. (2006) indicates that formal monetary policy targets–exchange rate, money supply or inflation targets–palpably decrease inflation in a sample of 40 countries. The authors employ various least squares estimations, which pick up the conditional average effect. However, there is wide inflation variability in the authors’ sample. Thus, formal targets could have very different effects in high- and low- inflation countries. Accordingly, we utilize the technique of quantile regression, a method frequently used in labour economics. We find, in a sample of low- and moderate-inflation countries, that formal targets exert no significant impact on low-inflation nations. This result is important for debates over formal targets, such as whether the United States should adopt an inflation target. There are costs and benefits in having formal targets, and finding that targets do not decrease inflation, when it is already moderate, is an important piece of information to consider.

DISINFLATIONARY BOOM REVERSION

Recent emphasis has been placed on exploring behavioral aspects of individual agents in explaining macroeconomic phenomena. Of particular interest is augmenting New Keynesian models to produce costly disinflation, as empirics and consensus suggest. We presume a fraction of agents using rule-of-thumb behavior in price setting in an otherwise standard New Keynesian model. Our findings suggest that relatively small amounts of rule-of-thumb behavior are required to offset the net effects of Balls disinflationary boom. Moderate levels of rule-of-thumb behavior can produce delayed recessions consistent with some VAR evidence. However, high proportions of rule-of-thumb behavior are needed to produce immediate reductions in output following implementation.