نقش انتظارات در نوسانات اقتصادی و اثر بخشی سیاست های پولی
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|25794||2005||49 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Economic Dynamics and Control, Volume 29, Issue 11, November 2005, Pages 2017–2065
Diverse beliefs is an important mechanism for propagation of fluctuations, money nonneutrality and efficacy of monetary policy. Since expectations affect demand, our theory shows economic fluctuations are mostly driven by varying demand not supply shocks. Using a competitive model with flexible prices in which agents hold Rational Belief (see Kurz, 1994. Economic Theory 4, 877–900) we show that (i) our economy replicates well the empirical record of fluctuations in the U.S. (ii) Under monetary rules without discretion, monetary policy has a strong stabilization effect and an aggressive anti-inflationary policy can reduce inflation volatility to zero. (iii) The statistical Phillips curve changes substantially with policy instruments and activist policy rules render it vertical. (iv) Although prices are flexible, money shocks result in less than proportional change in inflation hence aggregate price level is ‘sticky’ with respect to money shocks. (v) Discretion in monetary policy adds a random element to policy and increases volatility. The impact of discretion on the efficacy of policy depends upon the structure of market beliefs about future discretionary decisions. We study two rationalizable beliefs. In one, market beliefs weaken the effect of policy and in the second, beliefs bolster policy outcomes and discretion could be a desirable attribute of the policy rule. Since the central bank does not know any more than the private sector, discretion is beneficial only in extraordinary cases. Hence, the weight of the argument suggests that policy should be transparent and abandon discretion except for rare circumstances. (vi) Our model suggests the current real policy is only mildly activist and aims mostly to target inflation.
What explains the observed real effect of money on the economy and is money not neutral? This is perhaps the most debated question of our time. Empirical evidence has demonstrated that monetary policy, unanticipated and anticipated (e.g. Mishkin, 1982), has real effects and virtually all countries established economic stabilization as the main goal of central bank policy. However, if we seek a scientific justification for this policy, we find sharp differences in models, assumptions and methods used to arrive at this conclusion. On one side is the standard rational expectations (in short, RE) based real business cycle theory which holds that all real fluctuations are caused by exogenous real technological shocks, money is neutral and only relative prices matter for economic allocation. Under this theory, anticipated monetary policy cannot have real effect and hence stabilizing monetary policy cannot provide any long term and consistent social benefits (e.g. see Lucas, 1972 and Sargent and Wallace, 1975). An opposing view holds that money is not neutral, that economic fluctuations impose a policy tradeoff between inflation and unemployment and such a ‘Phillips curve’ is at the foundation of economic stabilization policy. This perspective has been developed by the Dynamic New Keynesian (in short DNK) Theory which erected the Keynesian view on three pillars: (1) the market consists of price setting monopolistically competitive firms, (2) prices are ‘sticky’ due to restrictions on firms’ ability to adjust prices (e.g. Taylor, 1980, Taylor, 1993, Taylor, 1999, Calvo, 1983, Yun, 1996 and Goodfriend and King, 1997; Bernanke et al., 1999, Clarida et al., 1999, Levin et al., 1999, Mankiw and Reis, 2002, McCallum and Nelson, 1999 and Rotemberg and Woodford, 1999; Woodford, 2001 and Woodford, 2003a), and (3) markets are complete, agents are identical and hold RE within a Rational Expectations Equilibrium (in short, REE). Most work with Calvo's (1983) idealization where at any date only a fraction of firms are ‘allowed’ to change prices while others cannot. In such an economy output fluctuations are caused by exogenous shocks and amplified by incorrect firms’ price setting. This monopolistic competitive equilibrium is not Pareto efficient. Changes in nominal rates have real effects because they impact expected future prices by firms. An exogenous shock causes some firms to change prices but others cannot adjust them and must produce output given prices set earlier, based on expectations held at that date and are thus the ‘wrong’ prices today. Monetary policy aims to restore efficiency by countering the negative effect of price rigidity. Depending upon the model of price stickiness, this objective implies that central bank aims to set nominal rates at each date so the resulting equilibrium private sector expected inflation equals the rate anticipated by agents forced to fix prices in the previous date. We share the DNK theory's view that monetary policy is a very useful stabilization tool. However, this paper shows an important cause for the efficacy of monetary policy is the heterogeneity of market expectations rather than price inflexibility or monopolistic competition in price setting. An argument in support of the efficacy of monetary policy would consist of three parts: (A) In a market economy agents make socially undesirable allocation decisions resulting in excess fluctuations of inflation and real variables hence a component of business cycle fluctuations is man made, endogenously propagated by the actions of market participants. (B) Money is not neutral: changes in the nominal rate impact aggregate excess demand. (C) Monetary policy can help stabilize the endogenous component of fluctuations. In what economies do conclusions (A)–(C) hold? Under the assumptions of (i) frictionless perfect competition, (ii) flexible prices and (iii) REE allocations, conclusions (A)–(C) cannot be reached: money is neutral and monetary policy has no social function. To deduce (A)–(C), some of these assumptions must be modified. The DNK theory rejects the first two, postulating instead a monopolistic price setting and price inflexibility. We preserve the assumptions of perfect competition and price flexibility hence our model economy is standard. However, we remove the homogeneous belief assumption and deduce our results from the assumption that agents hold heterogenous beliefs about state variables. In fact, even if a monetary policy rule is transparent and there are no differences of opinion about what the rule is, agents make different price forecasts since they forecast different values of the state variables. Our equilibrium is a Radner equilibrium (Radner, 1972) with an expanded state space, a development explained in detail in this paper. We restrict beliefs by requiring them to satisfy the rationality principle of rational belief (in short RB or RBE for ‘rational belief equilibrium’) developed by Kurz (1994) and others in Kurz, 1996 and Kurz, 1997a. Since heterogeneity of beliefs is the driving force of our theory, we provide here a short review of the RB perspective. 1.1. The Rational Belief principle ‘Rational Belief’ is not a theory which demonstrates rational agents should adopt any specific belief. In fact, since the RB theory explains the observed heterogeneity of beliefs, it would be a contradiction to propose that any particular belief is the ‘correct’ belief which rational agents must adopt. The RB theory starts by observing that the true stochastic law of motion of the economy is a nonstationary process with structural breaks and complex dynamics and the probability law of this process is not known by anyone. Agents have a long history of data generated by the process in the past which they use to compute relative frequencies of finite dimensional events and correlation among observed variables. With this knowledge they compute the empirical distribution of observed variables and use it to construct an empirical probability measure over sequences. Since all these measures are based on the law of large numbers, it is a theorem that this estimated probability model must be stationary. In the RB theory it is called the ‘empirical measure’ or the ‘stationary measure.’ In contrast with REE where the true law of motion is known, agents in an RBE form beliefs based only on available data. Hence, any principle on the basis of which agents can be judged as rational must be based on the data rather than on the true but unknown law of motion. Since a ‘belief’ is a model of the economy together with a probability measure over sequences of variables, such a model can be simulated to generate artificial data. With simulated data the agent can compute the empirical distribution of observed variables and hence the empirical probability measure the model implies. Based on these facts, the RB theory proposes a simple Principle of Rationality. It says that if the agent's model does not reproduce the empirical distribution known for the real economy, then the agent's model (i.e. ‘belief’) is declared irrational. The contra-positive is also required to hold: for a belief to be rational its simulated data must reproduce the known empirical distribution of the observed variables. To ‘reproduce’ an empirical distribution means to match all its moments. The RB rationality means a belief is viewed as rational if it is a model which cannot be disproved with the empirical evidence. Since diverse theories are compatible with the same evidence, this rationality principle permits diversity of subjective beliefs among equally informed rational agents. Agents who hold rational beliefs may make ‘incorrect’ forecasts at any date but must be correct, on average. Also, date t forecasts may deviate from the forecast implied by the empirical distribution. However, since the RB rationality principle requires the long term average of an agent's forecasts to agree with the forecast based on the empirical frequencies, it follows as a theorem that agents who hold rational beliefs which are different from the empirical distribution must have forecast functions which vary over time. The key tool we use to describe the distribution of beliefs in an economy is the ‘market state of belief’ which uniquely defines the conditional probabilities of agents. Since this is a central idea of our paper, we dedicate Section 3.1 to explain it in detail. 1 We also note that RB rationality is compatible with several known theories. An REE is a special case and so are the associated REE with sunspots. Also, several models of Bayesian Learning and Behavioral Economics are special cases of an RBE and satisfy the RB rationality principle for some parameter choices. A short explanation of how an RBE leads to implications (A)–(C) above may be helpful. In a typical RBE endogenous variables depend upon the state of belief which exhibit fluctuations over time. Such fluctuations induce fluctuations of endogenous variables making them more volatile than explained by exogenous shocks. Market fluctuations are further amplified by correlation among beliefs of agents. Belief heterogeneity takes two forms: (i) diverse interpretation of information, and (ii) diverse forecasts of endogenous variables due to diverse individual forecasts of future state of belief of others. ‘Optimistic,’ agents increase the level of economic activity above normal and ‘pessimistic’ agents cut back on consumption, investment and production plans below normal levels. Hence, fluctuations in the market state of belief is an important market externality. Implication (B) showing money is not neutral in an RBE is not new. It was reported by Motolese, 2001 and Motolese, 2003 and Kurz et al. (2003) who study monetary policy in a model of random growth of money. This paper builds on Kurz et al. (2003) who demonstrate that, in an otherwise frictionless economy, diversity of beliefs can reproduce the empirical regularities observed in monetary economies. To see why money is not neutral in an RBE one refers to Lucas (1972). In this seminal contribution he showed money neutrality is fundamentally an expectational problem. To exhibit money neutrality Lucas (1972) shows one must assume common information with common beliefs across agents, all expecting money to be neutral. This property does not hold under diverse beliefs (also, see Woodford, 2003b). Hence, if common belief in neutrality of money does not hold, money is not neutral. As for implication (C), central bank policy cannot affect fluctuations due to technology. Since money is not neutral, the excess endogenous volatility of a market economy suggests the bank can stabilize the endogenous component of fluctuations by countering the effect of private beliefs. Rigidities and imperfections such as inflexible wages, costly input adjustments or asymmetric information certainly play some role in the efficacy of monetary policy. Such factors complement our theory: adding any of these rigidities to our theory only strengthen our conclusions. Diversity of beliefs is a propagation mechanism which generates demand driven real and financial market volatility. It provides a unifying paradigm to explain the propagation of business fluctuations, to clarify why monetary policy is effective and to justify the use of such policy as a stabilization tool. This paper explores how a central bank can attain stabilization by countering the effect of private expectations. We examine diverse monetary policy rules in order to study their stabilization effect in our economy. The structure of this paper is as follows. In Sections 2–3 we develop a simple model (extending Kurz et al., 2005), explain the structure of beliefs and the RB restrictions. In Section 4 we study the volatility of RBE with money shocks using computational methods. We compare its volatility with the level of fluctuations of the traditional Real Business Cycles (RBC in short) model and with the economy in which money grows at a constant rate. In Section 5 we study the performance of the economy under simple Taylor (1993) type rules with and without discretion and inertia. Section 6 offers an interpretation of the efficacy of monetary policy under heterogenous beliefs and its relation to the violation of iterated expectations of market belief.