Copyright (c) 2011 All rights reserved. http://works.bepress.com/peter_ireland Recent documents in Peter N. Ireland en-us Tue, 11 Jan 2011 01:31:41 PST 3600 http://works.bepress.com/peter_ireland/20 http://works.bepress.com/peter_ireland/20 Sun, 09 Jan 2011 11:21:21 PST This paper estimates, using data from the United States and Euro Area, a two-country stochastic growth model in which both neutral and investment-specific technology shocks are nonstationary but cointegrated across economies. The results point to large and persistent swings in productivity, both favorable and adverse, originating in the US but not transmitted to the EA. More specifically, the results suggest that while the EA missed out on the period of rapid investment-specific technological change enjoyed in the US during the 1990s, it also escaped the stagnation in neutral technological progress that plagued the US in the 1970s. Peter N. Ireland Macroeconomics http://works.bepress.com/peter_ireland/19 http://works.bepress.com/peter_ireland/19 Sun, 09 Jan 2011 11:19:39 PST With an estimated New Keynesian model, this paper compares the "Great Recession" of 2007-09 to its two immediate predecessors in 1990-91 and 2001. The model attributes all three downturns to a similar mix of aggregate demand and supply disturbances. The most recent series of adverse shocks lasted longer and became more severe, however, prolonging and deepening the Great Recession. In addition, the zero lower bound on the nominal interest rate prevented monetary policy from stabilizing the US economy as it had previously; counterfactual simulations suggest that without this constraint, output would have recovered sooner and more quickly in 2009. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/18 http://works.bepress.com/peter_ireland/18 Sun, 09 Jan 2011 11:18:22 PST This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of real and nominal shocks. Finally, the analysis characterizes the optimal monetary policy response to shocks that originate in an explicitly-modeled financial sector. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/17 http://works.bepress.com/peter_ireland/17 Fri, 27 Apr 2007 09:52:59 PDT Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity of 1.79. Integrating under this money demand curve yields estimates of the welfare cost of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/15 http://works.bepress.com/peter_ireland/15 Sat, 27 Jan 2007 12:38:59 PST Traditionally, the effects of monetary policy actions on output are thought to be transmitted via monetary or credit channels. Real business cycle theory, by contrast, highlights the role of real price changes as a source of revisions in spending and production decisions. Motivated by the desire to focus on the effects of price changes in the monetary transmission mechanism, this paper incorporates a direct measure of the real own-price of money into an estimated vector autoregression and a calibrated real business cycle model. Consistent with this new view of the monetary transmission mechanism, both approaches reveal that movements in the own-price of money are strongly related to movements in output. Michael T. Belongia Monetary Economics http://works.bepress.com/peter_ireland/16 http://works.bepress.com/peter_ireland/16 Sat, 27 Jan 2007 12:38:59 PST This paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin. When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero. Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/14 http://works.bepress.com/peter_ireland/14 Sat, 27 Jan 2007 12:38:58 PST The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/13 http://works.bepress.com/peter_ireland/13 Sat, 27 Jan 2007 12:38:58 PST In a New Keynesian model, technology and cost-push shocks compete as terms that stochastically shift the Phillips curve. A version of this model, estimated via maximum likelihood, points to the cost-push shock as far more important than the technology shock in explaining the behavior of output, inflation, and interest rates in the postwar United States data. These results weaken the links between the current generation of New Keynesian models and the real business cycle models from which they were originally derived; they also suggest that Federal Reserve ocials have often faced dicult trade-offs in conducting monetary policy. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/12 http://works.bepress.com/peter_ireland/12 Sat, 27 Jan 2007 12:38:58 PST This paper focuses on the specification and stability of a dynamic, stochastic, general equilibrium model of the business cycle with sticky prices. Maximum likelihood estimates reveal that the data prefer a version of the model in which adjustment costs apply to the price level but not to the inflation rate. Formal hypothesis tests provide evidence of instability in the estimated parameters, concentrated in the Euler equation linking consumption growth to the interest rate. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/11 http://works.bepress.com/peter_ireland/11 Sat, 27 Jan 2007 12:38:57 PST A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon. Peter N. Ireland Macroeconomics http://works.bepress.com/peter_ireland/10 http://works.bepress.com/peter_ireland/10 Sat, 27 Jan 2007 12:38:57 PST A small, structural model of the monetary business cycle implies that real money balances enter into a correctly-specified, forward-looking IS curve if and only if they enter into a correctly-specified, forward-looking Phillips curve. The model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation. Maximum likelihood estimates of the model's parameters take both of these considerations into account, but still suggest that money plays a minimal role in the monetary business cycle. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/8 http://works.bepress.com/peter_ireland/8 Sat, 27 Jan 2007 12:38:56 PST In cash-in-advance models, necessary and sufficient conditions for the existence of an equilibrium with zero nominal interest rates and Pareto optimal allocations place restrictions only on the very long-run, or asymptotic, behavior of the money supply. When these asymptotic conditions are satisfied, they leave the central bank with a great deal of flexibility to manage the money supply over any finite horizon. But what happens when these asymptotic conditions fail to hold? This paper shows that the central bank can still implement the Friedman rule if its actions are appropriately constrained in the short run. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/9 http://works.bepress.com/peter_ireland/9 Sat, 27 Jan 2007 12:38:56 PST This paper characterizes Federal Reserve policy since 1980 as one that actively manages short-term nominal interest rates in order to control inflation and evaluates this policy using a dynamic, stochastic, sticky-price model of the United States economy. The results show that the Fed's policy insulates aggregate output from the effects of exogenous demand-side disturbances and, by calling for a modest but persistent reduction in short-term interest rates following a positive technology shock, helps the economy to respond to supply-side disturbances as it would in the absence of nominal rigidities. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/7 http://works.bepress.com/peter_ireland/7 Sat, 27 Jan 2007 12:38:55 PST In models with heterogeneous agents, issues of distribution and redistribution jump to the fore, raising the question: which policies--monetary or fiscal--work most effectively in transferring income from one group to another? To begin answering this question, this note works through a series of examples using Townsend's turnpike model. Two basic results emerge. First, the zero lower bound on nominal interest rates often appears as an obstacle to redistribution by monetary means. Second, assumptions made about the government's ability to raise tax revenue without distortion and to discriminate between agent types in distributing that tax revenue play a large role in determining whether agents prefer to redistribute income by monetary or fiscal means. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/5 http://works.bepress.com/peter_ireland/5 Sat, 27 Jan 2007 12:38:54 PST What explains the correlations between nominal and real variables in the postwar US data? Are these correlations indicative of significant nominal price rigidity? Or do they simply reflect the particular way that monetary policymakers react to developments in the real economy? To answer these questions, this paper uses maximum likelihood to estimate a model of endogenous money. This model allows, but does not require, nominal prices to be sticky. The results show that nominal price rigidity, over and above endogenous money, plays an important role in accounting for key features of the data. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/6 http://works.bepress.com/peter_ireland/6 Sat, 27 Jan 2007 12:38:54 PST This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/4 http://works.bepress.com/peter_ireland/4 Sat, 27 Jan 2007 12:38:53 PST This paper derives the restrictions imposed by Barro and Gordon's theory of time-consistent monetary policy on a bivariate time-series model for inflation and unemployment and tests those restrictions using quarterly US data from 1960 through 1997. The results show that the data are consistent with the theory's implications for the long-run behavior of the two variables, indicating that the theory can explain inflation's initial rise and subsequent fall over the past four decades. The results also suggest that the theory must be extended to account more fully for the short-run dynamics that appear in the data. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/3 http://works.bepress.com/peter_ireland/3 Sat, 27 Jan 2007 12:38:52 PST This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve's unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target. Peter N. Ireland Monetary Economics http://works.bepress.com/peter_ireland/2 http://works.bepress.com/peter_ireland/2 Sat, 27 Jan 2007 12:38:52 PST This paper develops a method for combining the power of a dynamic, stochastic, general equilibrium model with the flexibility of a vector autoregressive time-series model to obtain a hybrid that can be taken directly to the data. It estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar US economy, the stability of the real business cycle model's structural parameters, and the performance of the hybrid model's out-of-sample forecasts. Peter N. Ireland Macroeconomics http://works.bepress.com/peter_ireland/1 http://works.bepress.com/peter_ireland/1 Sat, 27 Jan 2007 12:38:51 PST Kydland and Prescott first identified the inflationary bias that results when a central bank does not precommit to a monetary policy rule. Subsequent work, published over the past twenty five years, demonstrates that this inflationary bias can be minimized by appointing central bankers whose preferences or incentives differ systematically from those of society as a whole. Subsequent work also shows that central bankers may optimally choose to maintain their reputations as inflation fighters. The literature to date, however, says remarkably little about how central bankers establish their reputations, or build credibility for their policies, in the first place. Peter N. Ireland Monetary Economics