Eric Schaling

Why money talks and wealth whispers : Monetary uncertainty and mystique

This paper analyzes the effect of monetary uncertainty on the inflationary bias and the variance of output and inflation. Monetary policy uncertainty is modeled as a shock to the central banker’s preference for inflation stabilization relative to output stabilization that cannot be observed by the public. We find that the mean and variance of inflation increase with the variance of this preference shock. However, unlike other studies, we find that monetary uncertainty may very well have a positive effect on output stabilization and therefore also on society’s welfare.

Central bank independence : A paneldata approach

The present paper uses a paneldata estimation technique to combine the time series for individual countries (Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Switzerland, the United Kingdom and the United States). We postulated the response of central banks in these countries to inflation, economic growth and current account surplus given the constraints to be the same among the sample countries. Differences between central bank independence come forward in a different structural pressure to lower or raise money market rates in these countries. The empirical results in this study coincide remarkably well with the legal indices of central bank independence.

The Non-Linear Phillips Curve and Inflation Forecast Targeting

This paper extends the Svensson inflation forecast targeting framework with a convex Phillips curve. An asymmetric target rule is derived, which implies a higher level of nominal interest rates than the Svensson forward-looking version of the reaction function popularised by Taylor. Extending the analysis with uncertainty about the output gap, it is found that uncertainty induces a further upward bias in nominal interest rates.

Monetary policy, determinacy, and learnability in a two-block world economy

We study how determinacy and learnability of worldwide rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework under both fixed and flexible exchange rates. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation.

Monetary Policy Uncertainty and Inflation: The Role of Central Bank Accountability

We analyse the issue of central bank accountability with the aid of a simple monetary policy game with uncertainty about the agents inflation stabilisation preferences. We find that there may be an important economic role for accountability in addition to its political function of making the central bank answerable to voters through its accountability to the executive. The model suggests that for countries with relatively little central bank independence, or perhaps a poor inflationary track record, significant reductions in inflation can be achieved by lowering monetary policy uncertainty. These reductions are much smaller for inflation-averse central banks, when monetary policy uncertainty is reduced by the same absolute amount. Thus, the effectiveness of accountability – as a means of lowering both inflation and inflation uncertainty – is higher the lower the degree of central bank conservativeness.

The ultimate determinants of Central Bank independence

Using a graphical method, a new way of determining the optimal degree of central bank conservativeness is developed in this paper. Unlike Lohmann (1992) and Rogoff (1985), we are able to express the upper and lower bounds of the interval containing the optimal degree of conservativeness in terms of the structural parameters of the model. Next, we show that optimal central bank independence is higher, the higher the natural rate of unemployment, the greater the benefits of unanticipated inflation, the less inflation-averse society, and the smaller the variance of productivity shocks. These propositions are tested for nineteen industrial countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, New Zealand, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States) for the post-Bretton-Woods period (1960-1993). In testing the model we employ a latent variables method (LISREL) in order to distinguish between actual and optimal monetary regimes.

New economy: new policy rules?

A bovine teat sanitizer includes a gun-like grip handle, trigger mechanism and control poppet valve connected to a pressurized sanitizing fluid supply. A fixed in-line teat cup sized to receive a predetermined volume of fluid from a proportioning valve sufficient for treating four teats of the bovine is connected to the handle. A toroidal overflow chamber receives displaced fluid from the cup when the cup captures and essentially seals a teat thus forcing sanitizing fluid into the teat strep canal and epidermis. The cup is lowered and displaced fluid from the overflow chamber returns to the cup cavity by gravity for use on the second and succeeding teats. A splash guard and teat guide snaps onto the cup and forms the chamber top and inner sides.

Learning, Inflation Expectations and Optimal Monetary Policy

In this paper we analyse disinflation policy in two environments. In the first, the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector inflation expectations are generated; in the second, the central bank has to learn the private sector inflation forecasting rule.With imperfect knowledge, results depend on the learning scheme that is employed.Here, the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.A novel feature of a learning-based policy as against the central banks disinflation policy under perfect knowledge is that the degree of monetary accommodation (the extent to which the central bank accommodates private sector inflation expectations) is no longer constant across the disinflation, but becomes state-dependent.This means that the central banks behaviour changes during the disinflation as it collects more information. Key words: learning, rational expectations, separation principle, Kalman filter, time-varying parameters, optimal control JEL classification numbers: C53, E43, E52, F33

Optimal central bank conservativeness in an open economy

This paper develops a graphical method to determinethe optimal degree of central bank conservativeness inan open economy. Unlike Rogoff (1985a), the upper andlower bounds of the interval containing the optimaldegree of conservativeness are expressed in terms ofthe structural parameters of the model. It is shownthat optimal central bank conservativeness is higher,the higher the natural rate of unemployment, thegreater the benefits of unanticipated inflation, theless inflation-averse society, the smaller thevariance of productivity shocks, the smaller realexchange rate variability and the smaller the opennessof the economy. These propositions are tested fornineteen industrial countries for the period1960–1993. In testing the model we employ a latentvariables method (LISREL) in order to distinguishbetween actual and optimal monetary regimes.

Capital Controls, Two-Tiered Exchange Rate Systems and Exchange Rate Policy: The South African Experience

South Africas 40 years of experience with capital controls on residents and non-residents (1961-2001) reads like a collection of examples of perverse unanticipated effects of legislation and regulation.We show that the presence of capital controls on residents and non-residents, enabled the South African Reserve Bank (SARB) to target domestic interest rates (and or the exchange rate) via interventions in the (commercial) foreign exchange market.This provides an early rationale for anchoring SA monetary policy via the exchange rate, rather than via domestic interest rates.This suggests not only that the capital controls themselves exhibited substantial institutional inertia, but that this same institutional inertia also applied to the monetary policy regime.A plausible reason for this is that for most of the 20th century in South Africa (partial) capital controls and exchange rate based monetary policies were like Siamese twins; almost impossible to separate.