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Business and Economics > Production and Operations Management

You are looking at 1 - 10 of 12 items for :

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Cover IMF Working Papers
Output Gap Uncertainty and Fiscal Policy Adjustment in Real-Time in Emerging Economies
Giacomo Cattelan
and
Boaz Nandwa
Uncertainty around the real-time output gap has important implications for fiscal policy. This study uses successive vintages of the World Economic Outlook for emerging markets (EMs) during 1998-2022 to examine the reaction of discretionary fiscal policy to uncertain economic cycle in real-time. The findings show that EMs tend to have persistently negative and significantly more volatile real-time output gap estimates compared to advanced economies (AEs) and are less responsive to the output gap shocks. We calibrate a New Keynesian DSGE model to match the behavior of an average EM. The results from the model suggest that when EM policy makers are equally concerned about uncertainty around the output gap estimates and about fiscal implementation, fiscal policy is less counter-cyclical than the benchmark case with no uncertainty, entailing an efficiency loss for the purpose of output gap stabilization. On the other hand, when the concern is only about output gap uncertainty, EM policy makers tend to react more counter-cyclically but at a cost of public debt spiking in the short term and stabilizing over the long term. This implies that it might be optimal for EM policy makers to act more aggressively to stabilize the economy. We show that by adjusting the relative importance of output gap vs debt stabilization in their objective function, EM policy makers can achieve a similar outcome as in the benchmark case with no uncertainty.
Keywords:
Fiscal policy; real-time output gap estimates; public debt; output gap uncertainty; output gap shock; output gap estimate; real-time output gap; fiscal policy adjustment; Output gap; Fiscal stance; Neoclassical theory
Cover IMF Working Papers
Optimal Simple Objectives for Monetary Policy when Banks Matter
Lien Laureys
,
Mr. Roland Meeks
, and
Boromeus Wanengkirtyo
We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilizing inflation, a measure of resource utilization, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.
Keywords:
Monetary policy; Simple loss function; Banks; Medium-scale DSGE models; Euro area economy.; WP; output gap stabilization; output gap volatility; output gap-inflation trade-off; inflation-output gap trade-off; stabilization objective; Euro area economy; Output gap; Inflation; Financial frictions; Inflation targeting; Production growth
Cover IMF Working Papers
Optimal Monetary Policy Under Bounded Rationality
Jonathan Benchimol
and
Lahcen Bounader
The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.
Keywords:
WP; central bank; monetary policy
Cover IMF Working Papers
A Closed Form Multivariate Linear Filter
Mr. Francis Vitek
This paper considers the problem of jointly decomposing a set of time series variables into cyclical and trend components, subject to sets of stochastic linear restrictions among these cyclical and trend components. We derive a closed form solution to an ordinary problem featuring homogeneous penalty term difference orders and static restrictions, as well as to a generalized problem featuring heterogeneous penalty term difference orders and dynamic restrictions. We use our Generalized Multivariate Linear Filter to jointly estimate potential output, the natural rate of unemployment and the natural rate of interest, conditional on selected equilibrium conditions from a calibrated New Keynesian model.
Keywords:
WP; Closed form; Multivariate linear filter; New Keynesian model; Potential output; Natural rate of unemployment; Natural rate of interest; gap estimate; objective function; estimates to parameter perturbation; parameter estimate; maximization problem; inflation gap estimate; equilibrium value; interest rate gap; estimation Results; Unemployment rate; Output gap; Central bank policy rate; Neoclassical theory; Global
Cover IMF Working Papers
Farms, Fertiliser, and Financial Frictions: Yields from a DSGE Model
Mr. Sébastien Walker
This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with a financial accelerator which captures key features of low-income countries (LICs). The predominance of supply shocks in LICs poses distinct challenges for policymakers, given the negative correlation between inflation and the output gap in the case of supply shocks. Our results suggest that: (1) in the face of a supply-side shock, the most desirable interest rate rule involves simply targeting current inflation and smoothing the policy interest rate; and (2) ignoring financial frictions when evaluating policy rules can be particularly problematic in LICs, where financial frictions loom especially large.
Keywords:
WP; production function; Monetary policy; Africa; financial frictions; foreign capital flows; DSGE models; supply shocks; world fertiliser price shock; Calvo price-stickiness parameter; rate of return; auditing cost; price inflation; factor price; nominal interest rate; price of fertiliser; fertiliser cost; world cost; expected return; Inflation; Output gap; Exchange rates; Sub-Saharan Africa
Cover IMF Working Papers
Unconventional Policy Instruments in the New Keynesian Model
Zineddine Alla
,
Mr. Raphael A Espinoza
, and
Mr. Atish R. Ghosh
This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the ‘divine coincidence’ breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker’s preferences when both instruments are available. We show that the use of an unconventional instrument can help reduce the zone of equilibrium indeterminacy and the volatility of the economy. However, in some circumstances, committing not to use the second instrument may be welfare improving (a result akin to Rogoff (1985a) example of counterproductive coordination). We further show that the optimal central banker should be both aggressive against inflation, and interventionist in using the unconventional policy instrument. As long as price setting depends on expectations about the future, there are gains from establishing credibility by using any instrument that affects these expectations.
Keywords:
WP
Cover IMF Working Papers
Steady as She Goes—Estimating Potential Output During Financial “Booms and Busts”
Mr. Helge Berger
,
Mr. Thomas Dowling
,
Mr. Sergi Lanau
,
Mr. Mico Mrkaic
,
Mr. Pau Rabanal
, and
Marzie Taheri Sanjani
Potential output—in the sense of the GDP level or path an economy can sustain over the medium term—is a crucial benchmark for policymakers. However, it is difficult to estimate when financial “booms and busts” are driving the real economy. This paper uses a simple multivariate filtering approach to illustrate the role financial variables play in driving potential or sustainable output. The results suggest that it moves more steadily during financial “boom and bust” periods than implied by conventional HP filter estimates, which tend to more closely follow actual GDP. A two-region, multisector New Keynesian DSGE model with financial frictions sheds light on the economic forces that could be behind the results obtained from the filter. This has important implications for policymakers.
Keywords:
WP; MVF output gap; boom and bust; Spain output gaps estimate; house price; MVF-implied output gap; Spain output gaps from a MVF Model; Potential output; Output gap; Credit; housing price movement; Housing prices; Financial frictions; Global
Cover IMF Working Papers
Output Gap in Presence of Financial Frictions and Monetary Policy Trade-offs
Francesco Furlanetto
,
Paolo Gelain
, and
Marzie Taheri Sanjani
The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.
Keywords:
WP; monetary policy; Financial Frictions; Potential output; Optimal Monetary Policy; Output Gap; output gap stabilization; computing output gap; wage inflation; mark-up shock; asset price inflation; efficient frontier; output gap dynamics; monetary policy authority; implied output gaps; output gap in presence; inflation target shock; monetary policy shock; Wages; Inflation
Cover IMF Working Papers
Accounting for Output Drops in Latin America
Mr. Ruy Lama
This paper evaluates what type of models can account for the recent episodes of output drops in Latin America. I develop an open economy version of the business cycle accounting methodology (Chari, Kehoe, and McGrattan, 2007) in which output fluctuations are decomposed into four sources: total factor productivity (TFP), a labor wedge, a capital wedge, and a bond wedge. The paper shows that the most promising models are the ones that induce fluctuations of TFP and the labor wedge. On the other hand, models of fnancial frictions that translate into a bond or capital wedge are not successful in explaining output drops in Latin America. The paper also discusses the implications of these results for policy analysis using alternative DSGE models.
Keywords:
WP; open economy; labor wedge; working capital
Cover IMF Staff Country Reports
France: Selected Issues
International Monetary Fund
This Selected Issues paper for France provides an analytical framework to explain the consequences of the downward shift in the unemployment/wages relationship. This framework is also used to analyze possible changes in the equilibrium unemployment rate resulting from cuts in employers’ social security contributions and movements in the user cost of capital. The contribution of wage moderation to the reduction in the equilibrium unemployment is quantified. The paper also addresses the question of fiscal benefits of job-rich growth in France during 1997–2000.
Keywords:
ISCR; CR; labor market; pair FR-IT; poverty program; unemployment locus; wage moderation; unemployment spending; Inflation; Employment; Neoclassical theory; Wages; Output gap; Global; Europe