A Theory of The Procyclical Effectiveness of Forward Guidance

• Autorzy: Paweł Kopiec
• Języki publikacji: EN

Abstrakty

EN

I study the dependence of the forward guidance effectiveness on the level of economic slack. I use the model with price rigidities and uninsured unemployment risk and apply both analytical and numerical methods to study the forward guidance transmission in both "normal times" and the crisis during which the unemployment rate rises by 150 percent. High unemployment accompanied by low job-finding rates raises the unemployment risk and increases precautionary motives. This, in turn, constrains the ability of the monetary authority to boost current demand by announcing cuts in future policy rates. The severity of that limitation increases with the time horizon of the announced change in interest rate. Quantitatively, the drop in the interest rate elasticity of aggregate consumption between the horizon of the interest rate cut equal to zero (i.e. the standard monetary policy shock) and the horizon equal to 15 quarters is 35.3% larger in the crisis than in "normal times". These more pronounced horizon effects imply that the forward guidance effectiveness is in general lower in the crisis than in "normal times".(original abstract)

Słowa kluczowe

EN

Monetary policy; Unemployment; Procyclicality

PL

Polityka pieniężna; Bezrobocie; Procykliczność

• Czasopismo: Collegium of Economic Analysis SGH - Working Papers
• Rocznik: 2022
• Numer: nr 81
• Strony: 67

Twórcy

autor

Paweł Kopiec

• SGH Warsaw School of Economics

Bibliografia

• Acharya, S. Dogra, K. (2020). Understanding HANK: Insights From a PRANK. "Econometrica", 88(3):1113-1158.
• Alpanda, S., Granziera, E., Zubairy, S. (2021). State dependence of monetary policy across business, credit and interest rate cycles. "European Economic Review", 140(C).
• Auclert, A. (2019). Monetary Policy and the Redistribution Channel. "American Economic Review", 109(6):2333-2367.
• Auclert, A., Rognlie, M., Straub, L. (2018). The Intertemporal Keynesian Cross. NBER Working Papers 25020, National Bureau of Economic Research, Inc.
• Auerbach, A. J. Gorodnichenko, Y. (2012). Measuring the Output Responses to Fiscal Policy. "American Economic Journal: Economic Policy", 4(2):1-27.
• Basu, S. Fernald, J. G. (1997). Returns to Scale in U.S. Production: Estimates and Implications. "Journal of Political Economy", 105(2):249-283.
• Bilbiie, F. (2019). Monetary Policy and Heterogeneity: An Analytical Framework. 2019 Meeting Papers 178, Society for Economic Dynamics.
• Bilbiie, F. O. (2020). The New Keynesian cross. "Journal of Monetary Economics", 114(C):90-108.
• Blinder, A., Ehrmann, M., de Haan, J., Jansen, D.-J. (2017). Necessity as the mother of invention: monetary policy after the crisis. "Economic Policy", 32(92):707-755.
• Burgard, J. P., Neuenkirch, M., Noeckel, M. (2019). State-Dependent Transmission of Monetary Policy in the Euro Area. "Journal of Money, Credit and Banking, 51(7):2053-2070.
• Calvo, G. A. (1983). Staggered prices in a utility-maximizing framework. "Journal of Monetary Economic"s, 12(3):383-398.
• Carroll, C., Slacalek, J., Tokuoka, K., White, M. N. (2017). The distribution of wealth and the marginal propensity to consume. "Quantitative Economics", 8(3):977-1020.
• Challe, E. (2020). Uninsured Unemployment Risk and Optimal Monetary Policy in a Zero-Liquidity Economy. "American Economic Journal: Macroeconomics", 12(2):241-283.
• Del Negro, M., Giannoni, M., Patterson, C. (2012). The forward guidance puzzle. Staff Reports 574, Federal Reserve Bank of New York.
• Den Haan, W., Rendahl, P., Riegler, M. (2018). Unemployment (Fears) and Deflationary Spirals. "Journal of the European Economic Association", 16(5):1281-1349.
• den Haan, W. J., Ramey, G., Watson, J. (2000). Job Destruction and Propagation of Shocks. "American Economic Review", 90(3):482-498.
• Eggertsson, G. B. Woodford, M. (2003). The Zero Bound on Interest Rates and Optimal Monetary Policy. "Brookings Papers on Economic Activity", 34(1):139-235.
• Farhi, E. Werning, I. (2019). Monetary Policy, Bounded Rationality, and Incomplete Markets. "American Economic Review", 109(11):3887-3928.
• Ganong, P. Noel, P. (2019). Consumer Spending during Unemployment: Positive and Normative Implications. "American Economic Review", 109(7):2383-2424.
• Gornemann, N., Kuester, K., Nakajima, M. (2016). Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy. International Finance Discussion Papers 1167, Board of Governors of the Federal Reserve System (U.S.).
• Guerrieri, V. Lorenzoni, G. (2017). Credit Crises, Precautionary Savings, and the Liquidity Trap. "The Quarterly Journal of Economics", 132(3):1427-1467.
• Hagedorn, M., Luo, J., Manovskii, I., Mitman, K. (2019a). Forward guidance. "Journal of Monetary Economics", 102(C):1-23.
• Hagedorn, M. Manovskii, I. (2008). The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited. "American Economic Review", 98(4):1692-1706.
• Hagedorn, M., Manovskii, I., Mitman, K. (2019b). The Fiscal Multiplier. NBER Working Papers 25571, National Bureau of Economic Research, Inc.
• Jorda, O., Schularick, M., Taylor, A. M. (2020). The effects of quasi-random monetary experiments. "Journal of Monetary Economics", 112(C):22-40.
• Kaplan, G., Moll, B., Violante, G. L. (2018). Monetary Policy According to HANK." American Economic Review", 108(3):697-743.
• Kolsrud, J., Landais, C., Nilsson, P., Spinnewijn, J. (2018). The Optimal Timing of UI Benefits: Theory and Evidence from Sweden." American Economic Review", 108(4):985-1033.
• Krueger, D., Mitman, K., Perri, F. (2016). Macroeconomics and Household Heterogeneity, volume 2 of Handbook of Macroeconomics, chapter 0, pages 843-921. Elsevier.
• Krusell, P., Mukoyama, T., Sahin, A. (2010). Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations. "Review of Economic Studies", 77(4):1477-1507.
• Krusell, P., Mukoyama, T., Smith Jr., A. A. (2011). Asset prices in a Huggett economy. "Journal of Economic Theory", 146(3):812-844.
• Lo, M. C. Piger, J. (2005). Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model. "Journal of Money, Credit and Banking", 37(5):865-886.
• McKay, A., Nakamura, E., Steinsson, J. (2016). The Power of Forward Guidance Revisited. "American Economic Review", 106(10):3133-3158.
• McKay, A. Reis, R. (2016). The Role of Automatic Stabilizers in the U.S. Business Cycle. "Econometrica", 84:141-194.
• Michaillat, P. (2014). A Theory of Countercyclical Government Multiplier. "American Economic Journal: Macroeconomics", 6(1):190-217.
• Michaillat, P. Saez, E. (2015). Aggregate Demand, Idle Time, and Unemployment. "The Quarterly Journal of Economics", 130(2):507-569.
• Michaillat, P. Saez, E. (2019). Optimal Public Expenditure with Inefficient Unemployment. "Review of Economic Studies", 86(3):1301-1331.
• Owyang, M. T., Ramey, V. A., Zubairy, S. (2013). Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data. "American Economic Review", 103(3):129-134.
• Parker, J. A. (1999). The Reaction of Household Consumption to Predictable Changes in Social Security Taxes. "American Economic Review", 89(4):959-973.
• Parker, J. A., Souleles, N. S., Johnson, D. S., McClelland, R. (2013). Consumer Spending and the Economic Stimulus Payments of 2008. "American Economic Review", 103(6):2530-2553.
• Peersman, G. Smets, F. (2002). Are the effects of monetary policy in the euro area greater in recessions than in booms? Monetary Transmission in Diverse Economies. Cambridge University Press.
• Ramey, V. A. Zubairy, S. (2018). Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data. "Journal of Political Economy", 126(2):850-901.
• Ravn, M. O. Sterk, V. (2021). Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach. "Journal of the European Economic Association", 19(2):1162-1202.
• Rotemberg, J. J. (1982). Sticky Prices in the United States. "Journal of Political Economy", 90(6):1187-1211.
• Shimer, R. (2005). The Cyclical Behavior of Equilibrium Unemployment and Vacancies, "American Economic Review", 95(1):25-49.
• Silva, J. I. Toledo, M. (2009). Labor Turnover Costs And The Cyclical Behavior Of Vacancies And Unemployment. "Macroeconomic Dynamics", 13(S1):76-96.
• Souleles, N. S. (1999). The Response of Household Consumption to Income Tax Refunds. "American Economic Review", 89(4):947-968.
• Tenreyro, S. and Thwaites, G. (2016). Pushing on a String: US Monetary Policy Is Less Powerful in Recessions. "American Economic Journal: Macroeconomics", 8(4):43-74.
• Weise, C. L. (1999). The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach. "Journal of Money, Credit and Banking", 31(1):85-108.
• Werning, I. (2015). Incomplete Markets and Aggregate Demand. NBER Working Papers 21448, National Bureau of Economic Research, Inc.