Efrem Castelnuovo

Monetary Policy, Inflation Expectations and the Price Puzzle

This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.

TAYLOR RULES AND INTEREST RATE SMOOTHING IN THE EURO AREA

A document processing arrangement transporting checks or like financial documents at a prescribed nominal speed along a track, terminated by sort-pockets, each with an associated diverter plus a guide assembly for guiding and driving a so-diverted document into its pocket, the guide comprising an inject roll to accelerate the document, plus an arm-assembly coupled to rotate with the roll and including an arm for guiding a so-injected document toward its position in the pocket-stack; this roll and arm assembly being arranged to rotate the arm away from its stack each time a document is entering, and also to be spring-driven to return the arm toward its stack.

Calvo vs. Rotemberg in a trend inflation world: An empirical investigation

This paper estimates and compares new-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes - Calvo, Rotemberg - and a positive trend inflation rate. Our empirical findings (i) support trend inflation-equipped models as better fitting during the U.S. great moderation period, (ii) provide evidence in favor of the statistical superiority of the Calvo setting, and (iii) suggest the absence of price indexation under the Calvo mechanism only. Possibly, the superiority of the Calvo model (against Rotemberg) is due to the restrictions implied by such pricing scheme for the aggregate demand equation. The determinacy regions associated to the two estimated models indicate relevant differences in the implementable simple policies. Our findings call for the development of monetary policy models consistently embedding a positive trend inflation rate and possibly based on a Calvo pricing scheme.

Learning-by-Doing vs. Learning by Researching in a model of climate change policy analysis

Many predictions and conclusions in climate change literature have been made on the basis of theoretical analyses and quantitative models that assume exogenous technological change. One may wonder if those policy prescriptions hold in the more realistic case of endogenously evolving technologies. In previous work we modified a popular integrated assessment model to allow for an explicit role of the stock of knowledge which accumulates through R&D investment. In our formulation knowledge affects the output production technology and the emission-output ratio. In this paper we make progress in our efforts aimed to model the process of technological change. In keeping with recent theories of endogenous growth, we specify two ways in which knowledge accumulates: via a deliberate, optimally selected R&D decision or via experience, giving rise to Learning by Doing. We simulate the model under the two versions of endogenous technical change and look at the dynamics of a number of relevant variables.

The price puzzle: fact or artefact?

This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a weak central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre-inflation targeting regime for the UK. Using a micro-founded New Keynesian monetary policy model for the US economy, we then show that the structural VARs are capable of reproducing the price puzzle on artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, this model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed on actual data.

Efficiency and Equity of Emissions Trading with Endogenous Environmental Technical Change

In recent years, particularly the last one, there have been many attempts to quantify the costs of implementing the Kyoto agreement under different policy options, i.e. with or without different degrees of introduction of the so-called ‘flexibility mechanisms’ (Emissions Trading, Joint Implementation, Clean Development Mechanisms).1 Despite the high variability, all estimates show that the Kyoto flexibility mechanisms significantly reduce the costs of compliance. Shogren (1999) notes that ‘it is estimated that any agreement without the cost flexibility provided by trading will at least double the US costs, ... the key is to distribute emissions internationally so as to minimise the costs of climate policy’. Manne and Richels (1999) state that ‘losses in 2010 are two and one-half times higher with the constraint on the purchase of carbon emissions rights; international co-operation through trade is essential if we are to reduce mitigation costs’. These are just two examples of the many studies reaching the same conclusion: emissions trading, and more generally flexibility mechanisms, can achieve a reduction in overall mitigation costs without reducing the effectiveness of the climate policy (see also Rose and Stevens, 1999; Bosello and Roson, 1999; Hourcade, Ha-Duong, and Lecocq, 1999; Tol, 1999). The same conclusion can also be achieved independently of the specific climate model adopted.

Estimating Fiscal Multipliers: News from a Non‐Linear World

We estimate nonlinear VARs to assess to what extent fiscal spending multipliers are countercyclical in the United States. We deal with the issue of non-fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures. This measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending. Results based on generalized impulse responses suggest that fiscal spending multipliers in recessions are greater than one, but not statistically larger than those in expansions. However, nonlinearities arise when focusing on “extreme” events, i.e. deep recessions vs. strong expansionary periods.

Testing the Structural Interpretation of the Price Puzzle with a Cost Channel Model

We estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.

Emission Trading Restrictions with Endogenous Technological Change

In this paper we use a simple climate model with endogenous environmental technical change in order to analyse the effects on equity and efficiency of different degrees of restrictions on trade in the market for pollution permits. The model is obtained by incorporating in Nordhaus and Yang (1996)’s RICE model and the notion of induced technical change as proposed in Goulder and Mathai (1998). With the help of such a model we aim at assessing the pros and cons of the introduction of ceilings on emission trading. In particular, we analyse the implications of restrictions on trading both in terms of their cost effectiveness and in terms of their distributional effects. The analysis takes into account the role of environmental technical change that could be enhanced by the presence of ceilings on trading. However, this effect is shown to be offset by the increased abatement cost induced by the larger than optimal adoption of domestic policy measures when ceilings are binding. Hence, our analysis provides little support in favour of quantitative restrictions on emission trading even when these restrictions actually have a positive impact on technical change. Even in terms of equity, ceilings find no justification within our theoretical and modelling framework. Indeed, we find that flexibility mechanisms in the presence of endogenous technical change increase equity and that the highest equity levels are achieved without ceilings, both in the short and in the long run.

What does Monetary Policy Reveal about a Central Bank's Preferences?

The design of monetary policy depends on the targeting strategy adopted by the central bank. This strategy describes a set of policy preferences, which are actually the structural parameters to analyse monetary policy making. Accordingly, we develop a calibration method to estimate a central banks preferences from the estimates of an optimal Taylor-type rule. The empirical analysis on US data shows that output stabilization has not been an independent argument in the Feds objective function during the Greenspans era. This suggests that the output gap has entered the policy rule only as leading indicator for future inflation, therefore being only instrumental (to stabilize inflation) rather than important per se. Copyright Banca Monte dei Paschi di Siena SpA, 2003