100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
PP target and ZLB essay plans (Macroeconomics FHS) $13.39   Add to cart

Other

PP target and ZLB essay plans (Macroeconomics FHS)

 12 views  0 purchase
  • Course
  • Institution

Structured essay plans of past exam price path targets and zero lower bound essay questions. Prepared and used by a first class E&M student to revise for Section B of the Macroeconomics FHS paper.

Preview 2 out of 9  pages

  • June 27, 2024
  • 9
  • 2023/2024
  • Other
  • Unknown
  • Unknown
avatar-seller
[2021] ‘Macroeconomic theory provides many examples in which the optimal monetary policy is time
inconsistent, but the practical relevance of those examples is limited. Nevertheless, there are other
justifications for the introduction of price path targets for monetary policy authorities.’ Discuss.

 (1.1) Optimal policy is time inconsistent in cost-push shock with NKPC (stabilization bias) but PP
targets fix this




o
o Assume no transmission lag
o Non-optimal feasible policy: A > C > A
o Optimal policy with forward guidance: A > C > D > E
 NKPC shifts down due to higher expected future inflation
 πt = Etπt+1 + k(yt-ye)
 (1.2) More efficient but inconsistent
 2 small deviations from bliss point rather than 1 large deviation. Given
the quadratic loss function, this is preferred.
 [equation] ,




 [graph]
 Normally time inconsistent since prefer A over E. Ex-ante rational to
commit, ex-post irrational to follow through
 (1.3) PP target makes this time consistent
 [graph] PP target pi-t graph and log P-t graph.
o [Example] Ukraine war with oil + grain cost push shock, Covid supply chain disruption
cost push shock (semiconductor chips, shipping costs)
 (1b) Practical relevance of forward guidance with NKPC depends on whether NKPC holds,
meaning whether sticky prices holds and firms care about future inflation due to possibility of
not being able to change price in next period under Calvo pricing

o Sticky prices are built on menu costs and real rigidities, but little real rigidities observed
(no flat MC as labour supply is relatively inelastic)

, o If NKPC does not hold, forward guidance does not work, this time inconsistent optimal
policy would not work, even if CB can credibly commit to it
 (2) Optimal policy is time inconsistent in negative demand shock near ZLB (commitment to
irresponsibility) but PP targets fix this
o




o [Example] Near ZLB since GFC 2008
 (2b) Practical relevance of solving ZLB problems with PP targets depends on whether
assumption of RE holds
o At ZLB, PP target imparts stimulus via 2 channels:
o (i) expectations over low future nominal policy rates which lower current long rates
 (i) depends mainly on RE in the financial sector
 eg. if outlook for short rates is flat, banks infer funding will be cheap and they
pass this on in mortgage and other rates. Strong evidence
o (ii) rise in expected future inflation which reduces current real long rates
 (ii) depends mainly on RE in consumer/corporate sectors in that when expected
future inflation increases
 Borrowers must infer that existing loan offers are more attractive in real terms
(lower current real long rates) and buy now instead of in the future. Less
evidence
 (2c) Practical relevance on efficacy of PP targets depends on convex PC and whether RE holds
o Convex PC can affect the stabilising properties of the PP regime
 For a given fall in output (from ye), convex PC implies smaller ↓π
 Under the PP regime, this limits the rise in future expected inflation (since a
smaller ↓π now requires a smaller ↑π above the 2% stable rate later to return
to the price path)
 Hence, this limits the declines in current real long rates
o This need not impair the stabilising properties of the PP regime

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller ib45pointer. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $13.39. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

72042 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$13.39
  • (0)
  Add to cart