Technology shocks and Monetary Policy: Assessing the Fed’s ... -...
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Technology shocks and Monetary Policy:Assessing the Fed’s performance
(J.Gali et al., JME 2003)
Miguel Angel Alcobendas, Laura Desplans, Dong Hee Joe
March 5, 2010
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 1 / 34
![Page 2: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/2.jpg)
Contents
1 Introduction
2 Baseline model
3 Monetary rules
4 Comparison: Empirical evidence VS Simulation
5 Conclusion
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 2 / 34
![Page 3: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/3.jpg)
Introduction: Three famous chiarmans of the Fed
We only know three chiarmans of the Fed
Ben S. Bernanke (2006 - now)
Very famous economistTV star during the financial crisis
Alan Greenspan (1987 - 2006)
The ”Maestro” of the economyThe Age of Turbulence
Paul A. Volcker (1979 - 1987)
Second oil shockTypical Hawkish
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 3 / 34
![Page 4: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/4.jpg)
Introduction: Three famous chiarmans of the Fed
We only know three chiarmans of the Fed
Ben S. Bernanke (2006 - now)
Very famous economistTV star during the financial crisis
Alan Greenspan (1987 - 2006)
The ”Maestro” of the economyThe Age of Turbulence
Paul A. Volcker (1979 - 1987)
Second oil shockTypical Hawkish
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 3 / 34
![Page 5: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/5.jpg)
Introduction: Three famous chiarmans of the Fed
We only know three chiarmans of the Fed
Ben S. Bernanke (2006 - now)
Very famous economistTV star during the financial crisis
Alan Greenspan (1987 - 2006)
The ”Maestro” of the economyThe Age of Turbulence
Paul A. Volcker (1979 - 1987)
Second oil shockTypical Hawkish
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 3 / 34
![Page 6: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/6.jpg)
Introduction: Three famous chiarmans of the Fed
We only know three chiarmans of the Fed
Ben S. Bernanke (2006 - now)
Very famous economistTV star during the financial crisis
Alan Greenspan (1987 - 2006)
The ”Maestro” of the economyThe Age of Turbulence
Paul A. Volcker (1979 - 1987)
Second oil shockTypical Hawkish
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 3 / 34
![Page 7: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/7.jpg)
Introduction: Main Question
Main question of the paper⇒ How well does the Fed do its job?
What is the Fed’s job?
The Federal Reserve Act says ”...to promote maximum sustainableoutput and employment and to promote stable prices”
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 4 / 34
![Page 8: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/8.jpg)
Introduction: Main Question
Main question of the paper⇒ How well does the Fed do its job?
What is the Fed’s job?
The Federal Reserve Act says ”...to promote maximum sustainableoutput and employment and to promote stable prices”
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 4 / 34
![Page 9: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/9.jpg)
Introduction: Main Question
Main question of the paper⇒ How well does the Fed do its job?
What is the Fed’s job?
The Federal Reserve Act says ”...to promote maximum sustainableoutput and employment and to promote stable prices”
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 4 / 34
![Page 10: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/10.jpg)
Introduction: How well the Fed does its job
To answer how well the Fed does its job, the paper
identifies technology shock as the only source of the unit root in laborproductivity
characterizes the Fed’s systematic response to technology shocks andits implications for U.S. output, hours and inflation based on astructural VAR model
compares the empirical responses to the simulated ones from threesimple monetary policies in the context of a standard business cyclemodel with sticky prices
1 optimal policy: one that fully stabilizes prices2 simple Taylor rule3 monetary targeting rule
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 5 / 34
![Page 11: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/11.jpg)
Introduction: How well the Fed does its job
To answer how well the Fed does its job, the paper
identifies technology shock as the only source of the unit root in laborproductivity
characterizes the Fed’s systematic response to technology shocks andits implications for U.S. output, hours and inflation based on astructural VAR model
compares the empirical responses to the simulated ones from threesimple monetary policies in the context of a standard business cyclemodel with sticky prices
1 optimal policy: one that fully stabilizes prices2 simple Taylor rule3 monetary targeting rule
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 5 / 34
![Page 12: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/12.jpg)
Introduction: How well the Fed does its job
To answer how well the Fed does its job, the paper
identifies technology shock as the only source of the unit root in laborproductivity
characterizes the Fed’s systematic response to technology shocks andits implications for U.S. output, hours and inflation based on astructural VAR model
compares the empirical responses to the simulated ones from threesimple monetary policies in the context of a standard business cyclemodel with sticky prices
1 optimal policy: one that fully stabilizes prices2 simple Taylor rule3 monetary targeting rule
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 5 / 34
![Page 13: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/13.jpg)
Introduction: How well the Fed does its job
To answer how well the Fed does its job, the paper
identifies technology shock as the only source of the unit root in laborproductivity
characterizes the Fed’s systematic response to technology shocks andits implications for U.S. output, hours and inflation based on astructural VAR model
compares the empirical responses to the simulated ones from threesimple monetary policies in the context of a standard business cyclemodel with sticky prices
1 optimal policy: one that fully stabilizes prices2 simple Taylor rule3 monetary targeting rule
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 5 / 34
![Page 14: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/14.jpg)
Baseline model: A New Keynesian model
A simple version of the Calvo(1983) model with sticky prices
Key feature of New Keynesian model: Nominal rigidities
Representative household, continuum of firms (i ∈ [0, 1]), monetarypolicy
Two key features of the baseline model
1 imperfect competition: differentiated goods, i.e. firms set theirprices
2 sticky prices: only a fraction of firms can reset their prices in anygiven period
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 6 / 34
![Page 15: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/15.jpg)
Baseline model: A New Keynesian model
A simple version of the Calvo(1983) model with sticky prices
Key feature of New Keynesian model: Nominal rigidities
Representative household, continuum of firms (i ∈ [0, 1]), monetarypolicy
Two key features of the baseline model
1 imperfect competition: differentiated goods, i.e. firms set theirprices
2 sticky prices: only a fraction of firms can reset their prices in anygiven period
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 6 / 34
![Page 16: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/16.jpg)
Baseline model: A New Keynesian model
A simple version of the Calvo(1983) model with sticky prices
Key feature of New Keynesian model: Nominal rigidities
Representative household, continuum of firms (i ∈ [0, 1]), monetarypolicy
Two key features of the baseline model
1 imperfect competition: differentiated goods, i.e. firms set theirprices
2 sticky prices: only a fraction of firms can reset their prices in anygiven period
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 6 / 34
![Page 17: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/17.jpg)
Baseline model: A New Keynesian model
A simple version of the Calvo(1983) model with sticky prices
Key feature of New Keynesian model: Nominal rigidities
Representative household, continuum of firms (i ∈ [0, 1]), monetarypolicy
Two key features of the baseline model
1 imperfect competition: differentiated goods, i.e. firms set theirprices
2 sticky prices: only a fraction of firms can reset their prices in anygiven period
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 6 / 34
![Page 18: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/18.jpg)
Baseline model: Household
Infinitely lived representative household solving
max E0
∞∑t=0
βt(C 1−σ
t
1− σ− N1+ϕ
t
1 + ϕ)
subject to∫ 1
0Pt(i)Ct(i)di + QtBt ≤ Bt−1 + WtNt
limT→∞
EtBT ≥ 0
where Ct ≡ (∫ 10 Ct(i)1− 1
ε di)εε−1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 7 / 34
![Page 19: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/19.jpg)
Baseline model: Household
Pt(i): price of good i at t
Pt ≡ (∫ 10 Pt(i)1−εdi)
11−ε : aggregate price index at t
Ct(i): amount consumed of good i at t
Ct : aggregate consumption index as previously defined
Bt : quantity of 1 period risk-free discount bonds purchased at t
Qt : its price at t
Wt : nominal wage (per hour) at t
Nt : hours worked at t
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 8 / 34
![Page 20: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/20.jpg)
Baseline model: Household optimization
Solving the problem and taking the log, we get the labor supplyschedule
wt − pt = σct + ϕnt
Letting rt ≡ −logQt , rr ≡ −logβ and taking the first-order Taylorexpansion, we also get the log-linearized Euler equation
ct = − 1
σ(rt − Etπt+1 − rr) + Etct+1
and from the clearing of each market i (Yt(i) = Ct(i), so Yt = Ct),we get
yt = − 1
σ(rt − Etπt+1 − rr) + Etyt+1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 9 / 34
![Page 21: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/21.jpg)
Baseline model: Household optimization
Solving the problem and taking the log, we get the labor supplyschedule
wt − pt = σct + ϕnt
Letting rt ≡ −logQt , rr ≡ −logβ and taking the first-order Taylorexpansion, we also get the log-linearized Euler equation
ct = − 1
σ(rt − Etπt+1 − rr) + Etct+1
and from the clearing of each market i (Yt(i) = Ct(i), so Yt = Ct),we get
yt = − 1
σ(rt − Etπt+1 − rr) + Etyt+1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 9 / 34
![Page 22: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/22.jpg)
Baseline model: Household optimization
Solving the problem and taking the log, we get the labor supplyschedule
wt − pt = σct + ϕnt
Letting rt ≡ −logQt , rr ≡ −logβ and taking the first-order Taylorexpansion, we also get the log-linearized Euler equation
ct = − 1
σ(rt − Etπt+1 − rr) + Etct+1
and from the clearing of each market i (Yt(i) = Ct(i), so Yt = Ct),we get
yt = − 1
σ(rt − Etπt+1 − rr) + Etyt+1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 9 / 34
![Page 23: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/23.jpg)
Baseline model: Firm
Continuum of firms each producing a differentiated good withtechnology
Yt(i) = AtNt(i), i ∈ [0, 1]
with a ≡ logAt following
∆at = ρ∆at−1 + εt
where ρ ∈ [0, 1)
Assumptions
1 variations in aggregate productivity are the only sources offluctuations
2 no capital accumulation (most results and implications notaffected)
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 10 / 34
![Page 24: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/24.jpg)
Baseline model: Firm
Continuum of firms each producing a differentiated good withtechnology
Yt(i) = AtNt(i), i ∈ [0, 1]
with a ≡ logAt following
∆at = ρ∆at−1 + εt
where ρ ∈ [0, 1)
Assumptions
1 variations in aggregate productivity are the only sources offluctuations
2 no capital accumulation (most results and implications notaffected)
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 10 / 34
![Page 25: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/25.jpg)
Baseline model: Firm’s profit maximizationunder flexible prices
Firms put markup on marginal cost to maximize profits
MCt = real marginal cost at t = real wage/marginal product = WtPtAt
combined with labor supply and good market clearings→ the common marginal cost for all firms
mct = (σ + ϕ)yt − (1 + ϕ)at
same CRS technology, same isoelastic demand, same real marginalcost across all firms
Yt(i) = AtNt(i), Ct(i) = (Pt(i)
Pt)−εCt
under flexible prices, the markup is common across all firms, given byε/(ε− 1) and mct = − log ε/(ε− 1) = mc (not depending on t)
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 11 / 34
![Page 26: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/26.jpg)
Baseline model: Firm’s profit maximizationunder flexible prices
Firms put markup on marginal cost to maximize profits
MCt = real marginal cost at t = real wage/marginal product = WtPtAt
combined with labor supply and good market clearings→ the common marginal cost for all firms
mct = (σ + ϕ)yt − (1 + ϕ)at
same CRS technology, same isoelastic demand, same real marginalcost across all firms
Yt(i) = AtNt(i), Ct(i) = (Pt(i)
Pt)−εCt
under flexible prices, the markup is common across all firms, given byε/(ε− 1) and mct = − log ε/(ε− 1) = mc (not depending on t)
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 11 / 34
![Page 27: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/27.jpg)
Baseline model: Firm’s profit maximizationunder flexible prices
Firms put markup on marginal cost to maximize profits
MCt = real marginal cost at t = real wage/marginal product = WtPtAt
combined with labor supply and good market clearings→ the common marginal cost for all firms
mct = (σ + ϕ)yt − (1 + ϕ)at
same CRS technology, same isoelastic demand, same real marginalcost across all firms
Yt(i) = AtNt(i), Ct(i) = (Pt(i)
Pt)−εCt
under flexible prices, the markup is common across all firms, given byε/(ε− 1) and mct = − log ε/(ε− 1) = mc (not depending on t)
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 11 / 34
![Page 28: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/28.jpg)
Baseline model: Firm’s profit maximizationunder flexible prices
Firms put markup on marginal cost to maximize profits
MCt = real marginal cost at t = real wage/marginal product = WtPtAt
combined with labor supply and good market clearings→ the common marginal cost for all firms
mct = (σ + ϕ)yt − (1 + ϕ)at
same CRS technology, same isoelastic demand, same real marginalcost across all firms
Yt(i) = AtNt(i), Ct(i) = (Pt(i)
Pt)−εCt
under flexible prices, the markup is common across all firms, given byε/(ε− 1) and mct = − log ε/(ε− 1) = mc (not depending on t)
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 11 / 34
![Page 29: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/29.jpg)
Baseline model: Equilibrium under flexible prices
Call the equilibrium processes under flexible prices Natural levels
Natural level of outputy∗t = γ + ψat
where ψ ≡ (1 + ϕ)/(σ + ϕ), γ ≡ mc/(σ + ϕ)
Natural level of employment
n∗t = γ + (ψ − 1)at
Natural rate of real interest rate
rr∗t = rr + σρψ∆at
where rrt : real interest rate at t
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 12 / 34
![Page 30: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/30.jpg)
Baseline model: Equilibrium under flexible prices
Call the equilibrium processes under flexible prices Natural levels
Natural level of outputy∗t = γ + ψat
where ψ ≡ (1 + ϕ)/(σ + ϕ), γ ≡ mc/(σ + ϕ)
Natural level of employment
n∗t = γ + (ψ − 1)at
Natural rate of real interest rate
rr∗t = rr + σρψ∆at
where rrt : real interest rate at t
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 12 / 34
![Page 31: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/31.jpg)
Baseline model: Equilibrium under flexible prices
Call the equilibrium processes under flexible prices Natural levels
Natural level of outputy∗t = γ + ψat
where ψ ≡ (1 + ϕ)/(σ + ϕ), γ ≡ mc/(σ + ϕ)
Natural level of employment
n∗t = γ + (ψ − 1)at
Natural rate of real interest rate
rr∗t = rr + σρψ∆at
where rrt : real interest rate at t
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 12 / 34
![Page 32: Technology shocks and Monetary Policy: Assessing the Fed’s ... - …fpj.portier.free.fr/teaching/m2/Session VI Presentation.pdf · Technology shocks and Monetary Policy: Assessing](https://reader036.fdocuments.us/reader036/viewer/2022071005/5fc1ecd6682cb3319a3dfa59/html5/thumbnails/32.jpg)
Baseline model: Equilibrium under flexible prices
Call the equilibrium processes under flexible prices Natural levels
Natural level of outputy∗t = γ + ψat
where ψ ≡ (1 + ϕ)/(σ + ϕ), γ ≡ mc/(σ + ϕ)
Natural level of employment
n∗t = γ + (ψ − 1)at
Natural rate of real interest rate
rr∗t = rr + σρψ∆at
where rrt : real interest rate at t
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 12 / 34
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Baseline model: under sticky prices
Assumption: Pri ,t(reset its price in this period) = 1-θ
the markup and the real marginal cost will no longer be constant andoutput gap (xt ≡ yt − y∗t ) may emerge
Then we can derive the new Phillips curve
πt = βEtπt+1 + kxt , k ≡(1− θ)(1− βθ)(σ + ϕ)
θ
and yt = − 1σ (rt − Etπt+1 − rr) + Etyt+1 can be rewritten as
xt = − 1
σ(rt − Etπt+1 − rr∗t ) + Etxt+1
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Baseline model: under sticky prices
Assumption: Pri ,t(reset its price in this period) = 1-θ
the markup and the real marginal cost will no longer be constant andoutput gap (xt ≡ yt − y∗t ) may emerge
Then we can derive the new Phillips curve
πt = βEtπt+1 + kxt , k ≡(1− θ)(1− βθ)(σ + ϕ)
θ
and yt = − 1σ (rt − Etπt+1 − rr) + Etyt+1 can be rewritten as
xt = − 1
σ(rt − Etπt+1 − rr∗t ) + Etxt+1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 13 / 34
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Baseline model: under sticky prices
Assumption: Pri ,t(reset its price in this period) = 1-θ
the markup and the real marginal cost will no longer be constant andoutput gap (xt ≡ yt − y∗t ) may emerge
Then we can derive the new Phillips curve
πt = βEtπt+1 + kxt , k ≡(1− θ)(1− βθ)(σ + ϕ)
θ
and yt = − 1σ (rt − Etπt+1 − rr) + Etyt+1 can be rewritten as
xt = − 1
σ(rt − Etπt+1 − rr∗t ) + Etxt+1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 13 / 34
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Baseline model: under sticky prices
Assumption: Pri ,t(reset its price in this period) = 1-θ
the markup and the real marginal cost will no longer be constant andoutput gap (xt ≡ yt − y∗t ) may emerge
Then we can derive the new Phillips curve
πt = βEtπt+1 + kxt , k ≡(1− θ)(1− βθ)(σ + ϕ)
θ
and yt = − 1σ (rt − Etπt+1 − rr) + Etyt+1 can be rewritten as
xt = − 1
σ(rt − Etπt+1 − rr∗t ) + Etxt+1
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 13 / 34
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The Basic New Keynesian Model
New Keynesian Phillips curveπt = βEt{πt+1}+ κxt
Dynamic IS Equationxt = −( 1
σ )(rt − Et{πt+1} − rr∗) + Et{xt+1}Monetary Policy Rule
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Dynamics effects of technology shocks
Alternative specifications of the systematic component of monetary policythat will try to lead us to the optimal allocation:
A simple Taylor rule
Constant money growth
How the nature of the monetary policy affects the equilibrium responses ofdifferent variables to a permanent shock to technology?
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Optimal monetary policy
Aim of monetary policy: to replicate the allocation associated withthe flexible price equilibrium.
The optimal policy requires that xt = πt = 0, for all t.
Flexible price equilibrium replicated with the following interest rule:rt = rr + σρψ4at + øππt for any φπ > 1
The equilibrium response of output and unemployment will matchthat of their natural levels
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Optimal monetary policy
The sign of the response of employment depends on the size of σ(1/σ: intertemporal elasticity of substitution between consumption in2 periods)
E0∑βt(C1−σ
t1−σ −
N1+ϕt
1+ϕ )
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Optimal monetary policy
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A simple Taylor rule
The central bank follows the rule:rt = rr + øππt + øxxt
Calibrationøπ = 1.5 øx = 0σ = 1 β = 0.99 ϕ = 1 ρ = 0.2 θ = 0.75
M.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 19 / 34
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A monetary targeting rule
mt −mt−1 = Λm
Without loss of generality assume Λm = 0, which is consistent withzero inflation in the steady state.
The demand for money is assumed to be mt − pt = yt − ηrt
Letting m∗t ≡ mt − pt − ψat
m∗t = xt − ηrtm∗t−1 = m∗t + πt + ψ4at
rt = rr + (σ−11+η )
∑( η1+η )κ−1Et{4yt+κ}
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The Fed’s response to technology shocks:evidence
Evidence on the Fed’s systematic response to technology shocks andits implications for U.S. output, hours and inflation.
Are those responses consistent with any of the rules considered in theprevious section?
Sample period 1954:I-1998:III. Pre-Volcker Period (1954:I-1979:II) -Volcker-Greenspan Period(1982:III-1998:III).
The empirical effects of technology shocks are determined throughthe estimation of a structural VAR.
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The Fed’s response to technology shocks:evidencePre-Volcker vs Volcker-Greenspan Era
Clarida, Galı and Gertler, QJE 2000
Estimation of a forward-looking monetary policy reaction function forthe post-war US economy. (1954:I-1998:III)
Results
Differences in estimated rule across across periodsVolcker-Greenspan (1982:III-1998:III) interest rate policy more sensitiveto changes in expected inflation than in the Pre-Volcker era(1954:I-1979:II)The Volcker-Greenspan rule is stabilizing over the equilibriumproperties of inflation and output
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The Fed’s response to technology shocks:evidenceIdentification and Estimation
We are considering a structural VAR(4) with four variables.
Only interested in exogenous variations in technology.
Yt =
Productivityt
πt
hourst
real interest ratet
Yt = F1Yt−1 + F2Yt−2 + F3Yt−3 + F4Yt−4 + Et
Identification restriction: Only technology shocks may have apermanent effect on the level of labor productivity (Gali AER 1999)
Productivityt = zt + ζt(Kt , Lt ,Zt ,Ut ,Nt)
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The Fed’s response to technology shocks:evidenceIdentification and Estimation
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The Fed’s response to technology shocks:evidenceThe Volcker-Greenspan Era 1982:III-1998:III
Estimated response to a positive technological shock (sd = 1) vs Impulse responseunder optimal policy.
Optimal Policy: xt = πt = 0
ρ = 0 , ∆at = ρ∆at−1 + εt , y∗t = γ +(
1+ϕσ+ϕ
)at
n∗t = γ +(
1+ϕσ+ϕ
− 1)
at , rr∗t = rr + σρ(
1+ϕσ+ϕ
)∆at
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The Fed’s response to technology shocks:evidenceThe Volcker-Greenspan Era 1982:III-1998:III
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The Fed’s response to technology shocks:evidenceThe Volcker-Greenspan Era 1982:III-1998:III
Both hours and inflation response functions are not significant
Volcker-Greenspan period consistent with the optimal policyM.A.Alcobendas, L. Desplans, D.H.Joe () TSE March 5, 2010 29 / 34
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The Fed’s response to technology shocks:evidenceThe Pre-Volcker Period (1954:I-1979:II)
Estimated response to a positive technological shock (sd = 1) vsImpulse response under optimal policy.
Optimal Policy: xt = πt = 0
ρ = 0.7 , ∆at = ρ∆at−1 + εt , y∗t = γ +(
1+ϕσ+ϕ
)at
n∗t = γ +(
1+ϕσ+ϕ
− 1)
at , rr∗t = rr + σρ(
1+ϕσ+ϕ
)∆at
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The Fed’s response to technology shocks:evidenceThe Pre-Volcker Period (1954:I-1979:II)
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The Fed’s response to technology shocks:evidenceThe Pre-Volcker Period (1954:I-1979:II)
Both hours and inflation response functions deviate from optimal path
Pre-Volcker period is not consistent with the optimal policy
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The Fed’s response to technology shocks:evidenceThe Pre-Volcker Period vs Monetary Targeting Rule
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Conclusions
Analysis of the Fed’s response to technology shocks and itsimplications for U.S. output, hours and inflation.
Consistency of the Fed’s (Volcker-Greenspan period) response to atechnology shock with a rule that seeks to stabilize prices and theoutput gap.
The Fed’s policy in Pre-Volcker period tended to overstabilize outputthus generating excess volatility in inflation.
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