Peter N. Ireland

Sticky-Price Models of the Business Cycle: Specification and Stability

This paper focuses on the specification and stability of a dynamic, stochastic, general equilibrium model of the American business cycle with sticky prices. Maximum likelihood estimates reveal that the data prefer a version of the model in which adjustment costs apply to the price level but not to the inflation rate. Formal hypothesis test detect instability in the estimated parameters, particularly in estimates of the representative households discount factor. Evidently, more detailed descriptions of the economy are needed to explain movements in interest rates before and after 1979.

Money's Role in the Monetary Business Cycle

A small, structural model of the monetary business cycle implies that real money balances enter into a correctly-specified, forward-looking IS curve if and only if they enter into a correctly-specified, forward-looking Phillips curve. The model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation. Maximum likelihood estimates of the modelÕs parameters take both these considerations into account, but still suggest that money plays a minimal role in the monetary business cycle.

A small, structural, quarterly model for monetary policy evaluation*

This paper develops a small, structural model of the United States economy and estimates that model with quarterly data on output, prices, and money from 1959 through 1995. The estimates reveal that the Federal Reserve has successfully insulated the economy from the effects of exogenous demand-side disturbances, so that most of the observed variation in aggregate output reflects the impact of supply-side shocks. Indeed, the model suggests that during the sample period, Federal Reserve policy has responded efficiently to these shocks, although the rate of inflation has been, on average, too high.

The Welfare Cost of Inflation in General Equilibrium

This paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates. A sustained 4% inflation like that experienced in the U.S. since 1983 costs the economy the equivalent of 0.41% of output per year when currency is identified as the relevant definition of money and over 1% of output per year when M1 is defined as money. The results illustrate how the traditional, partial equilibrium approach can seriously underestimate the true cost of inflation.

The Monetary Transmission Mechanism

The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.

The Role of Countercyclical Monetary Policy

When firms set nominal prices in advance, optimal monetary policy insulates aggregate output against shocks to demand. It can do so, however, by following the constant money growth rule advocated by Milton Friedman; it need not respond to the shocks in an actively countercyclical way. In addition, to the extent that output fluctuations are driven by shocks to supply, money growth should be procyclical.

Supply-side economics and endogenous growth

Abstract In a simple convex model of endogenous growth, the expansionary effects of a deficit-financed tax cut are often strong enough to allow the government debt to be paid off in the long run without the need for subsequent tax increases. A permanent and substantial reduction in marginal rates of income taxation can provide for both vigorous real economic growth and long-run government budget balance.

Endogenous Financial Innovation and the Demand for Money

This paper embeds two key ideas about the nature of financial innovation taken from the empirical literature into a familiar equilibrium monetary model. It provides formal support for several alternative econometric specifications for money demand that attempt to capture the effects of financial innovation and demonstrates that a popular theoretical model of money demand, when suitably modified, can account for some unusual monetary dynamics found in the data. Thus, it helps to establish both the theoretical relevance of recent empirical work and the empirical relevance of recent theoretical work on the demand of money.

Sustainable monetary policies

Abstract This paper uses a model with utility maximizing households, monopolistically competitive firms, and sticky goods prices to derive a version of Barro and Gordons time consistency problem for monetary policy where the governments objectives are consistent with a representative households preferences. The paper applies the methods of Chari and Kehoe to characterize the entire set of time consistent, or sustainable, outcomes. It goes on to find conditions under which the Friedman rule, the optimal policy under commitment, can be supported when the government lacks a commitment technology.

Interest Rates, Inflation, and Federal Reserve Policy since 1980

This paper characterizes Federal Reserve policy since 1980 as one that actively manages short-term nominal interest rates in order to control inflation and evaluates this policy using a dynamic, stochastic, sticky-price model of the United States economy. The results show that the Feds policy insulates aggregate output from the effects of exogenous demand-side disturbances and, by calling for a modest but persistent reduction in short-term interest rates following a positive technology shock, helps the economy to respond to supply-side disturbances as it would in the absence of nominal rigidities.