Mr. Tobias Adrian, Vitor Gaspar, and Mr. Francis Vitek
This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
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II. The Model
A. Infinitely-Lived Households
B. Borrowing-Constrained Households
1. Monetary Policy
2. Budget Constraint
3. Fiscal Policy
E. Competitive Equilibrium
F. Aggregate Welfare
A. Impulse Responses
1. Fiscal PolicyRuleParameters
2. Monetary PolicyRuleParameters
B. Welfare under Different Shocks
C. Welfare and Volatility
stance during the 1960s and 1970s to a procyclical stance thereafter. At the same time, the lower government levels followed a procyclical pattern throughout the period 1960–97, although this pattern became more pronounced during the second subperiod 1979–97 ( Figure I-8 ).
Figure I-8 .
Germany: Estimates of Core Budget Balances at Different Government Levels, 1960–97
(In percent of GDP)
Source: IMF, World Economic Outlook database; and staff estimates.
32. Using alternative output gap estimates for estimating the fiscal policyruleparameters affects
We study the welfare properties of an economy where both monetary and fiscal policy follow simple rules, and where a subset of agents is borrowing constrained. The optimized fiscal rule is far more aggressive than automatic stabilizers, and stabilizes the income of borrowingconstrained agents, rather than output. The optimized monetary rule features super-inertia and a very low coefficient on inflation, which minimizes real wage volatility. The welfare gains of optimizing the fiscal rule are far larger than the welfare gains of optimizing the monetary rule. The preferred fiscal instruments are government spending and transfers targeted to borrowing-constrained agents.
the beta distribution to be in the interval (0,1).
Baseline calibration and prior distributions of the parameters of the model.
Response of monetary policy rule to inflation (version of the model with passive monetary policy)
Response of monetary policy rule to inflation (version of the model with active monetary policy)
Response of monetary policy
In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non- Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.
B. Parameters Influencing Price Setting
C. Monetary PolicyRuleParameters