Martin Menner

Negative nominal interest rates: History and current proposals.

Martin Menner — Tue, 28 Jun 2011 11:16:20 PDT

Given the renewed interest in negative interest rates on base money—or equivalently ‘taxing money’—as a means for overcoming the zero bound on shortterm nominal interest rates, this article reviews the history of negative nominal interest rates starting from the ‘taxing money’ proposal of Silvio Gesell up to current proposals that received popular attention in the wake of the financial crisis of 2007/ 2008. It is demonstrated that ‘taxing money’ proposals have a long intellectual history and that instead of being the conjecture of a monetary crank, they are a serious policy proposal. In a second step, the article points out that besides the more popular debate on a Gesell tax as a means to remove the zero bound on nominal interest rates, there is a class of neoclassical search models that advocates a negative tax on money as efficiency enhancing. This strand of the literature has so far been largely ignored by the policy debate on negative interest rates.

Negative Nominal Interest Rates: History and Current Proposals

Martin Menner et al. — Mon, 17 Jan 2011 12:54:48 PST

Given the renewed interest in negative interest rates as a means for overcoming the zero bound on nominal interest rates, this article reviews the history of negative nominal interest rates and gives a brief survey over the current proposals that received popular attention in the wake of the financial crisis of 2007/08. It is demonstrated that ‘taxing money’ proposals have a long intellectual history and that instead of being the conjecture of a monetary crank, they are a serious policy proposal. In a second step the article points out that, besides the more popular debate on a Gesell tax as a means to remove the zero bound on nominal interest rates, there is a class of neoclassical search-models that advocates a negative tax on money as efficiency enhancing. This strand of the literature has so far been largely ignored by the policy debate on negative interest rates.

"Gesell tax" and Efficiency of Monetary Exchange

Martin Menner — Mon, 17 Jan 2011 07:31:19 PST

A periodic "Gesell Tax" on money holdings as a way to overcome the zero-lower-bound on nominal interest rates is studied in a framework where money is essential. For this purpose, I characterize the effciency properties of taxing money in a full-fledged macroeconomic business cycle model of the third-generation of monetary search models. Both, inflation and "Gesell taxes" maximize steady state capital stock, output, consumption, investment and welfare at moderate levels. The Friedman rule is sub-optimal, unless accompanied by a moderate 'Gesell tax'. In a recession scenario a Gesell tax speeds up the recovery in a similar way as a large fiscal stimulus but avoids "crowding out" of private consumption and investment.

The Role of Search Frictions for Output and Inflation Dynamics: A Bayesian Assessment

Martin Menner — Mon, 07 Jun 2010 01:57:41 PDT

A search-theoretic monetary DSGE model with capital formation and inventory investment is estimated and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better. It dominates the other models in the ability to predict the autocorrelations of inflation and the persistent (dis-)inflation process after a (technology) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models.

The Role of Search Frictions for Output and Inflation Dynamics: A Bayesian Assessment

Martin Menner — Tue, 24 Feb 2009 09:34:28 PST

A search-theoretic monetary DSGE model with capital and inventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better. It dominates the other models in the ability to predict the autocorrelations of inflation, the contemporaneous correlation between output growth and inflation, and in the persistent (dis-)inflation process after a (technology) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models.

On the Identification of Monetary (and Other) Shocks

Martin Menner et al. — Tue, 29 Jul 2008 04:21:49 PDT

The present DSGE model spells out explicitly the instrumentation of monetary policy. The interest rate is determined depending on supply and demand for reserves which are affected by fundamental shocks. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks and have the usual effects on economic activity. This view of monetary policy may have important consequences for empirical research: In the model, contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule. (JEL: C32, E13, E51, E52, E58)

The Role of Search Frictions for Output and Inflation Dynamics: A Bayesian Assessment

Martin Menner — Mon, 30 Jul 2007 06:19:54 PDT

Search frictions in the goods market have proven to be a fruitful deviation from the fiction of a centralized Walrasian market providing a micro-foundation of the use of money as a medium of exchange. Moreover, persistent propagation of monetary shocks can arise in search-theoretic monetary models through the interaction of search-frictions in the goods and labor markets, and inventory holdings.

Here, a search-theoretic monetary DSGE model with capital and inventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification.

The search model can track inflation and output data better, as well as it dominates the other models in the ability to predict the autocorrelations of inflation and the persistent disinflation process after a technology shock. It generates a hump-shaped but not strong enough output response to a monetary shock. Current and near current correlations between output growth inflation are predicted well.

A Search-Theoretic Monetary Business Cycle Model With Capital Formation

Martin Menner — Tue, 06 Feb 2007 03:39:35 PST

Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. We extend the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyze the monetary propagation mechanism and contrast the model .s implications with US business cycle stylized facts. With empirically plausible adjustment costs the model features a persistent propagation of monetary shocks and is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment. We find that monetary policy shocks are unlikely to be an important source of business cycle fluctuations but discover another dimension where money matters: the very frictions that make money essential shape also the responses of variables to real shocks

Monetary Propagation In Search-Theoretic Monetary Models

Martin Menner — Tue, 06 Feb 2007 03:35:15 PST

Shouyong Shi(1998) presents a general equilibrium model which shows a persistent monetary propagation mechanism. There the high persistence is obtained by a combination of search frictions in the goods and labor markets and the presence of final goods inventories. The present paper addresses the question of robustness of these results, especially, how sensitive are Shi's results to parameter changes and to different model specifications. Calibration of the parameters to intervals is used to perform a global sensitivity analysis. The calibration exercise reveals that the model is quite robust to changes in parameters. Comparing different model versions - including a CIA model which appears as a special case when buyers and sellers match always - we can disentangle and quantify the contributions of the various frictions in accounting for the persistent propagation. Search-frictions in the goods market and inventory holdings are necessary for persistent propagation of monetary shocks. Labor market frictions are not crucial but prolong the output responses and reduce their magnitude.

On the Identification of Monetary (and Other) Shocks

Martin Menner et al. — Tue, 06 Feb 2007 03:20:16 PST

The purpose of this paper is twofold. First, we construct a DSGE model which spells out explicitly the instrumentation of monetary policy. The interest rate is determined every period depending on the supply and demand for reserves which in turn are affected by fundamental shocks: unforeseeable changes in cash withdrawal, autonomous factors, technology and government spending. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks. We show that these monetary shocks have the usual effects on economic activity without the need of imposing additional frictions as limited participation in asset markets or sticky prices. Second, we show that this view of monetary policy may have important consequences for empirical research. In the model, the contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule. In addition, we use the sign of the impact responses of all shocks on output, prices and interest rates derived from the model to identify the sources of shocks in the data.

A Search-Theoretic Monetary Business Cycle Model with Capital Formation

Martin Menner — Tue, 06 Feb 2007 02:36:32 PST

Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. This paper extends the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyses the monetary propagation mechanism and contrasts the model's implications with US business cycle stylized facts. The propagation mechanism based on a feedback between increased search intensity and depleted inventories only survives in the presence of non-negligible capital adjustment costs. With intermediate adjustment costs the model is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment.