Timothy S. Fuerst

Liquidity, loanable funds, and real activity☆

Abstract This paper develops a general equilibrium model of two traditional explanations of the monetary ‘black box’ linking money and real activity: the liquidity effect and the loanable funds effect. These effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market. Since only borrowers have direct access to the newly injected cash. monetary injections cause nominal interest rates to fall. If firms are borrowers, then monetary injections also increase current and future real activity.

Timing and real indeterminacy in monetary models

An increasingly common approach to the theoretical analysis of monetary policy is to ensure that a proposed policy does not introduce real indeterminacy and thus sunspot fluctuations into the model economy. Policy is typically conducted in terms of directives for the nominal interest rate. This paper uses a discrete-time money-in-the-utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy. These differences arise because of the differing pricing equations for the nominal interest rate.

Investment and interest rate policy: a discrete time analysis

This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.

Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy

A consideration of the welfare consequences of two simple monetary policy rules--an interest rate peg and a money growth peg--in a dynamic general-equilibrium model, indicating that the interest rate rule dominates the money growth rule.

Monetary and Financial Interactions in the Business Cycle

This paper develops a computable general equilibrium model in which endogenous agency costs can potentially alter business cycle dynamics. The model resembles the influential theoretical work of Ben Bernanke and Mark Gertler (1989). Two sources of shocks are considered: productivity shocks and monetary shocks. The model is parametrized to match key features of U.S. aggregate activity. The principal result of the analysis is that agency costs add very little to the basic business cycle dynamics. Copyright 1995 by Ohio State University Press.

Monetary shocks, agency costs, and business cycles

Abstract This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real business cycle model modified to include endogenous agency costs. The chief contribution of the paper is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?

Asset prices, nominal rigidities, and monetary policy

Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.

Oil prices, monetary policy, and counterfactual experiments

Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects.

Inflation and output in New Keynesian models with a transient interest rate peg

A familiar result in the canonical Dynamic New Keynesian (DNK) model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding. We examine a general class of interest rate pegs in a variety of DNK models. Standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg. This unusual behavior does not arise in sticky information models of the Phillips curve.

Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets

What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor Principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor Principle applies at the sectoral level, there is no need for a Taylor Principle at the aggregate level.