Jean Barthélemy

Generalizing the Taylor Principle: New Comment

In this paper, we provide determinacy conditions, i.e. conditions ensuring the existence and uniqueness of a bounded solution, in a purely forward-looking linear Markov switching rational expectations model. We thus settle the debate between Davig and Leeper (2007) and Farmer et al. (2010). The conditions derived by the former are valid in a subset of bounded solutions only depending on a finite number of past regimes, that we call Markovian. However, in the complete bounded solution space, the new determinacy conditions we derive are tighter. Nevertheless, when unique, the solution coincides with the Markovian solution of Davig and Leeper (2007). We finally illustrate our results in the standard new-Keynesian model studied by Davig and Leeper (2007) and Farmer et al. (2010).

Trends and Cycles: An Historical Review of the Euro Area

We analyze the euro area business cycle in a medium scale DSGE model where we assume two stochastic trends: one on total factor productivity and one on the inflation target of the central bank. To justify our choice of integrated trends, we test alternative specifications for both of them. We do so, estimating trends together with the models structural parameters, to prevent estimation biases. In our estimates, business cycle fluctuations are dominated by investment specific shocks and preference shocks of households. Our results cast doubts on the view that cost push shocks dominate economic fluctuations in DSGE models and show that productivity shocks drive fluctuations on a longer term. As a conclusion, we present our estimations historical reading of the business cycle in the euro area. This estimation gives credible explanations of major economic events since 1985.

Global Imbalances and Imported Disinflation in the Euro Area

We estimate a medium-scale DSGE model for the euro area in an open economy framework. The model includes structural trends on all variables, which allow us to estimate on gross data. We first provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data, thus our model properly deals with deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro area imports during the last ten years on domestic inflation. From the first quarter of 2000 to the last quarter of 2008, we estimate the contribution of the imbalanced development of international trade on euro area inflation to an average of -0.7%, and on the 3-Month interest rate to an average of -1.4%.

The signaling effect of raising inflation

This paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central bankers credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central bankers type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify temporary deviations of inflation from target well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.

Credibility and Monetary Policy

This paper revisits the ability of central banks to manage private sectors expectations depending on its credibility and how this affects the use of interest rate rules and pegs to achieve monetary policy objectives. When private agents can only provide limited incentives for the central bank to follow a policy, we show that resulting limited credibility allows a central bank to prevents the inflation from diverging by defaulting on past promises if necessary. As a result, the Taylor rule, when expected, anchors inflation expectations on a unique equilibrium path as long as the Taylor principle is satisfied. Finally, we also show that limited credibility restricts the impact of long-term interest rate pegs, so as to make current conditions less dependent on future policy changes.We investigate the ability of monetary policy rules to implement a unique equilibrium outcome when the enforcement of rules is limited. We combine the approach of Bassetto (2005) and Atkeson et al. (2010) to study implementation and the one by Chari and Kehoe (1990) to allow policy deviations. Our main result is that, under limited enforcement, there does not exist a policy rule that implements a unique outcome: the private sector can always deter the central bank to stick to the rule. We then provide further results on implementation when private agents expect a given policy and when they hesitate between multiple policies.

Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis

This paper assesses the effect on banks’ lending activity of accepting illiquid collateral at the central bank refinancing facility in times of wholesale funding stress. We exploit original data on the loans granted by the 177 largest euro area banks between 2011m1 and 2014m12 and on the composition of their pool of collateral pledged with the Eurosystem. During this period, two-thirds of the banks in our sample experienced a sizable loss of wholesale funding. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem reduced their lending to non-financial firms and households less: a one standard deviation increase in the volume of illiquid collateral pledged corresponded to a 0.6% increase in loans to the economy. This result holds for banks that were and were not run. Our finding thus suggests that the broad range of collateral eligible in the euro area may have helped to mitigate the credit crunch during the euro debt crisis.