Monetary Policy

Question 1

Walsh (1995)

Answer 1

REAL-WORLD MEASURE TO TACKLE INFLATION BIAS

New Zealand links tenure of central bank governor to achievement of inflation targets, an explicit incentive contract

Question 2

REAL-WORLD MEASURE TO TACKLE INFLATION BIAS

New Zealand links tenure of central bank governor to achievement of inflation targets, an explicit incentive contract

Answer 2

Walsh (1995)

Question 3

Example of real-world measure to tackle inflation bias?

Answer 3

Walsh (1995)

REAL-WORLD MEASURE TO TACKLE INFLATION BIAS

New Zealand links tenure of central bank governor to achievement of inflation targets, an explicit incentive contract

Question 4

Possible evidence for secular stagnation?

Answer 4

Laubach and Williams (2003)

Estimate significant decline in the natural rate of interest from ~6% in 60s to ~2% in 00s (and approx. 0% now)

Question 5

Laubach and Williams (2003)

Answer 5

SECULAR STAGNATION

Estimate significant decline in the natural rate of interest from ~6% in 60s to ~2% in 00s (and approx. 0% now)

Question 6

SECULAR STAGNATION

Estimate significant decline in the natural rate of interest from ~6% in 60s to ~2% in 00s (and approx. 0% now)

Answer 6

Laubach and Williams (2003)

Question 7

Gaspar et al (2007)

Answer 7

1. Inflation target leads to uncertainty about long-run price level
2. Reason - evidence shows that different CBs w/same inflation targets have different average log-run inflation rates
3. 1999-2006
   (i) Sweden’s price level significantly below 2% inflation target consistent path
   (ii) Canada and Eurozone price level significantly above 2% path

Question 8

1. Inflation target leads to uncertainty about long-run price level
2. Reason - evidence shows that different CBs w/same inflation targets have different average log-run inflation rates
3. 1999-2006
   (i) Sweden’s price level significantly below 2% inflation target consistent path
   (ii) Canada and Eurozone price level significantly above 2% path

Answer 8

Gaspar et al (2007)

Question 9

Evidence that inflation targets can result in long-run uncertainty about the price level

Answer 9

Gaspar et al (2007)

1. Inflation target leads to uncertainty about long-run price level
2. Reason - evidence shows that different CBs w/same inflation targets have different average log-run inflation rates
3. 1999-2006
   (i) Sweden’s price level significantly below 2% inflation target consistent path
   (ii) Canada and Eurozone price level significantly above 2% path

Question 10

Romer (2008)

Answer 10

MENU COSTS EVIDENCE

Quantitative analysis - no plausible cost of price adjustment consistent with firms not cutting prices in face of recession

Question 11

MENU COSTS EVIDENCE

Quantitative analysis - no plausible cost of price adjustment consistent with firms not cutting prices in face of recession

Answer 11

Romer (2008)

Question 12

Evidence against sticky prices?

Answer 12

Romer (2008)

Quantitative analysis - no plausible cost of price adjustment consistent with firms not cutting prices in face of recession

Question 13

Klomp and Han (2010)

Answer 13

EVIDENCE - CB INDEPENDENCE

1. Meta-analysis of studies examining relationship between inflation and CB independence
2. Finding – CB independence has statistically significant effect on inflation

Question 14

EVIDENCE - CB INDEPENDENCE

1. Meta-analysis of studies examining relationship between inflation and CB independence
2. Finding – CB independence has statistically significant effect on inflation

Answer 14

Klomp and Han (2010)

Question 15

Evidence of effect of delegation to independent CB on inflation bias

Answer 15

Klomp and Han (2010)

1. Meta-analysis of studies examining relationship between inflation and CB independence
2. Finding – CB independence has statistically significant effect on inflation