Journal of Money, Credit, and Banking, Volume 36, 2004 - Table of Contents

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 [Access article in PDF] 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 [Access article in PDF] Subject Headings:

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 [Access article in PDF] Subject Headings:

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.

Catching Up with the Joneses in a Sticky Price Model [Access article in PDF] 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.

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 [Access article in PDF] 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 [Access article in PDF] 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.