In this paper, a simple search model of the labor market is combined with sticky prices to invest... more In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.
This paper surveys the implications of uncertainty for the design of monetary policy. Among the t... more This paper surveys the implications of uncertainty for the design of monetary policy. Among the topics discussed are the impact of imperfect or noisy information on the performance of simple rules, the performance of rules that are robust to the exogenous disturbance processes, the effects of parameter uncertainty, and the implications of robust control. The analysis is conducted using a new Keynesian framework. One finding is that difference rules seem to perform well in the presence of imperfect information about the output gap.
Central banks in the major industrialized economies implement policy by intervening in the money ... more Central banks in the major industrialized economies implement policy by intervening in the money market to achieve a target level for a short-term interest rate.1 Why central banks use a short-term interest rate as a policy instrument, and how they achieve the targeted value they set for this rate are topics to be discussed in chapter 11. The focus in this chapter is on the role of nancial markets and the linkages between the interest rate a¤ected directly by monetary policy and the broad range of market interest rates and credit conditions that a¤ect investment and consumption spending. After considering issues of price level determinacy and liquidity traps in section 2, the term structure of interest rates and the relationship between short-term and long-term interest rates are discussed in section 3. Recent work has linked the term structure models commonly used in the nance literature to the types of macro models commonly used to investigate monetary policy issues. These model...
We derive a linear-quadratic model that is consistent with sticky prices and search and matching ... more We derive a linear-quadratic model that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how welfare costs are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We show the labor market structure has important implications for optimal monetary policy. (JEL E24, E31, E52)
Within the current rules of the game, Argentina's central the sector (which could give it greater... more Within the current rules of the game, Argentina's central the sector (which could give it greater access to outside bank (BCRA) is charged with being the lender of last liquidity) and prudential strengthening of the system. resort as well as providing full convertibility between Triage of weaker banks should continue and not await pesos and U.S. dollarstwo objectives with one another crisis. More experience with the new liquidity instrument, namely, reserves. Within those rules, it may policy is needed and so is reform of the settlement well be that the balance of responsibilities needs to shift. system, as it affects the functioning of the interbank Complete dollarization can significantly reduce risks but market, which is essential for containing crises. not entirely eliminate them. If the BCRA can concentrate Essentially, however, no grand solution seems to exist more on building up reserves and helping to ward off for the problems that seem inevitable in a system where crises of confidence in the currency, perhaps the banking the central bank is also the currency board. Argentina's system can protect itself better from liquidity shocks. But strategy must therefore turn on actively strengthening its this will require, among other things, consolidation of banking systems to reduce the risks of insolvency.
The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of in... more The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of institutional change on economic relationships can be studied. The Act set price stability as the single objective of monetary policy and gave the Bank great independence. Reforms of this nature may lead to a greater short-run output-in¯ation tradeoff by altering optimal stabilisation policy and wage indexation. Allowing for environments where`learning' about the new regime is assumed to be rapid as well as slow, we ®nd that a large rise in the New Zealand tradeoff has occurred since implementation of the Act.
Interest in capital controls has been a highly cyclical industry. As Tobin (1996) observed "The i... more Interest in capital controls has been a highly cyclical industry. As Tobin (1996) observed "The interest that occasionally arose (for his transactions tax proposal) came from journalists and financial pundits. It was usually triggered by currency crises and died out when the crisis passed from the headlines." Financial crises have certainly been a frequent and painful feature of the international monetary system in recent years. The obvious welfare costs of crises have led to a general reevaluation of strategies for opening repressed financial systems to international competition.
In this paper, a simple search model of the labor market is combined with sticky prices to invest... more In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.
This paper surveys the implications of uncertainty for the design of monetary policy. Among the t... more This paper surveys the implications of uncertainty for the design of monetary policy. Among the topics discussed are the impact of imperfect or noisy information on the performance of simple rules, the performance of rules that are robust to the exogenous disturbance processes, the effects of parameter uncertainty, and the implications of robust control. The analysis is conducted using a new Keynesian framework. One finding is that difference rules seem to perform well in the presence of imperfect information about the output gap.
Central banks in the major industrialized economies implement policy by intervening in the money ... more Central banks in the major industrialized economies implement policy by intervening in the money market to achieve a target level for a short-term interest rate.1 Why central banks use a short-term interest rate as a policy instrument, and how they achieve the targeted value they set for this rate are topics to be discussed in chapter 11. The focus in this chapter is on the role of nancial markets and the linkages between the interest rate a¤ected directly by monetary policy and the broad range of market interest rates and credit conditions that a¤ect investment and consumption spending. After considering issues of price level determinacy and liquidity traps in section 2, the term structure of interest rates and the relationship between short-term and long-term interest rates are discussed in section 3. Recent work has linked the term structure models commonly used in the nance literature to the types of macro models commonly used to investigate monetary policy issues. These model...
We derive a linear-quadratic model that is consistent with sticky prices and search and matching ... more We derive a linear-quadratic model that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how welfare costs are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We show the labor market structure has important implications for optimal monetary policy. (JEL E24, E31, E52)
Within the current rules of the game, Argentina's central the sector (which could give it greater... more Within the current rules of the game, Argentina's central the sector (which could give it greater access to outside bank (BCRA) is charged with being the lender of last liquidity) and prudential strengthening of the system. resort as well as providing full convertibility between Triage of weaker banks should continue and not await pesos and U.S. dollarstwo objectives with one another crisis. More experience with the new liquidity instrument, namely, reserves. Within those rules, it may policy is needed and so is reform of the settlement well be that the balance of responsibilities needs to shift. system, as it affects the functioning of the interbank Complete dollarization can significantly reduce risks but market, which is essential for containing crises. not entirely eliminate them. If the BCRA can concentrate Essentially, however, no grand solution seems to exist more on building up reserves and helping to ward off for the problems that seem inevitable in a system where crises of confidence in the currency, perhaps the banking the central bank is also the currency board. Argentina's system can protect itself better from liquidity shocks. But strategy must therefore turn on actively strengthening its this will require, among other things, consolidation of banking systems to reduce the risks of insolvency.
The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of in... more The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of institutional change on economic relationships can be studied. The Act set price stability as the single objective of monetary policy and gave the Bank great independence. Reforms of this nature may lead to a greater short-run output-in¯ation tradeoff by altering optimal stabilisation policy and wage indexation. Allowing for environments where`learning' about the new regime is assumed to be rapid as well as slow, we ®nd that a large rise in the New Zealand tradeoff has occurred since implementation of the Act.
Interest in capital controls has been a highly cyclical industry. As Tobin (1996) observed "The i... more Interest in capital controls has been a highly cyclical industry. As Tobin (1996) observed "The interest that occasionally arose (for his transactions tax proposal) came from journalists and financial pundits. It was usually triggered by currency crises and died out when the crisis passed from the headlines." Financial crises have certainly been a frequent and painful feature of the international monetary system in recent years. The obvious welfare costs of crises have led to a general reevaluation of strategies for opening repressed financial systems to international competition.
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Papers by Carl Walsh