Journal of Money Credit and Banking

Journal of Money, Credit, and Banking
Volume 36, Number 1, February 2004

CONTENTS

Articles

    Benhabib, Jess, 1948-
  • Interest Rate Policy in Continuous Time with Discrete Delays
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    Subject Headings:
    • Interest rates -- Effect of inflation on -- Mathematical models.
    • Monetary policy -- Mathematical models.
    Abstract:
      We study the design of monetary policy in a continuous-time framework with delays. More explicitly, we consider a linear, flexible-price model where inflation and nominal interest rates change continuously, but where nominal rates are set by the Central Bank in response to a lagged inflation measure, and where the measure of inflation can be constructed as a flexible distributed delay. Therefore, the Central Bank has, in addition to the choice of an "active" or "passive" response to inflation, two additional parameters to select: the lag of the inflation measure, and the coefficient for the distributed delay to construct the inflation measure. The pure continuoustime and discrete-time frameworks emerge as special cases of our differential- delay system. This richer framework also allows us to reconcile results on the local uniqueness and multiplicity of equilibria that are obtained in the two pure cases, to uncover special assumptions embedded in the pure cases, and to prescribe effective policy options to avoid the problem of local indeterminacy and its unintended consequences.
    Keywords:
      Taylor rules, indeterminacy, delay.
    Davis, Michael C. (Michael Connelly), 1973-
    Hamilton, James D. (James Douglas), 1954-
  • Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices
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    Subject Headings:
    • Gasoline -- Prices -- Pennsylvania -- Mathematical models.
    Abstract:
      The menu-cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price. We find that this prediction is broadly consistent with the behavior of nine Philadelphia gasoline wholesalers. Nevertheless, we reject the menu-cost model as a literal description of these firms' behavior, arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes.
    Keywords:
      sticky prices, price adjustment, menu cost.
    Souleles, Nicholas S.
  • Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys
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    Subject Headings:
    • Consumers -- Michigan -- Atttiudes -- Mathematical models.
    • Rational expectations (Economic theory) -- Michigan -- Mathematical models.
    Abstract:
      The household data underlying the Michigan Index of Consumer Sentiment are used to test the rationality of consumer expectations and their usefulness in forecasting expenditure. The results can be interpreted as characterizing the shocks that hit different types of households over time. Expectations are found to be biased and inefficient, at least ex post. People underestimated the disinflation of the early 1980s and the severity of recent business cycles. People's forecast errors are also systematically correlated with their demographic characteristics, in part because of time-varying, group-level shocks. Further, sentiment helps forecast consumption growth. Some of this rejection of the permanent income hypothesis is due to the systematic demographic components in forecast errors.
    Keywords:
      consumer sentiment, consumer confidence, permanent income hypothesis, excess sensitivity, precautionary saving, subjective expectations, rational expectations, forecast errors, shocks, unobserved heterogeneity.
    Jung, Yongseung.
  • Catching Up with the Joneses in a Sticky Price Model
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    Subject Headings:
    • Prices -- Mathematical models.
    • Interest rates -- Effect of inflation on -- Mathematical models.
    • Business cycles -- Mathematical models.
    Abstract:
      This paper examines the effect of introducing external habit formation into Calvo-type and Taylor-type sticky price models. The paper shows that external habit formation improves the performance of sticky price models in explaining the selected variables at nearly all frequencies. While each model has diverse successes and failures, the Taylor-type sticky price model seems to capture more closely the hump-shaped spectra of the selected real variables of the data than the Calvo-type sticky price model.
    Keywords:
      Calvo-type sticky price, external habit formation, Taylor-type sticky price, interest rate rule.
    Bullard, James.
    Waller, Christopher, 1959-
  • Central Bank Design in General Equilibrium
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    Subject Headings:
    • Banks and banking, Central -- Mathematical models.
    • Monetary policy -- Mathematical models.
    • Equilibrium (Economics) -- Mathematical models.
    Abstract:
      We study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital-theoretic, general equilibrium economy. We consider three institutional arrangements for determining monetary policy. The first, unconditional majority voting, always leads to a substantial inflation bias. The second, a simple form of bargaining which we interpret as a policy board, generally improves on the unconditional majority voting outcome. Finally,we consider a constitutional rule which always achieves the social optimum.
    Keywords:
      political economy,monetary policy, time consistency, inflation bias.
    Guthrie, Graeme A. (Graeme Alexander), 1967-
    Wright, Julian, 1969-
  • The Optimal Design of Interest Rate Target Changes
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    Subject Headings:
    • Interest rates -- Mathematical models.
    • Banks and banking, Central -- Mathematical models.
    • Monetary policy -- Mathematical models.
    Abstract:
      Most central banks currently implement monetary policy by targeting a short-term interest rate. This paper asks: "What is the optimal form for such interest rate targeting, given the objectives facing central banks?" We find the optimal rule is for the central bank to change the target rate whenever the deviation between its preferred rate and the current target rate reaches some critical level, and in this case the target rate is changed by a discrete amount in the direction of its preferred rate. Despite the simplicity of this rule, we are able to replicate a number of puzzling features of interest rate targeting observed in practice, as well as explain some dynamic properties of market interest rates.
    Keywords:
      central banks, interest rate smoothing, monetary policy.
    Gwin, Carl R.
    Taylor, Beck A.
  • The Role of Search Costs in Determining the Relationship between Inflation and Profit Margins
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    Subject Headings:
    • Inflation (Finance) -- United States -- Mathematical models.
    • Wholesale trade -- United States -- Mathematical models.
    • Markup -- United States -- Mathematical models.
    Abstract:
      Previous empirical studies have found a negative relationship between inflation and industry profit margins. Recent theoretical findings, however, suggest that buyer search costs can significantly impact this relationship. We use an actual measure of search cost that varies across wholesale industries to estimate the impact of these costs on the relationship between inflation and markups. Using firm-level data from 57 industries, we show that margins increase during inflation if search costs become sufficiently high. Our findings reconcile the theoretical and empirical literatures on this topic.
    Keywords:
      inflation, profit margins, search costs.



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