Monetary policy

James Costain, Anton Nakov, 03 October 2015

Many models rely on the assumption of nominal price stickiness. But the different definitions of frictions can greatly alter their macroeconomic implications. In this column, price stickiness is modelled as the result of errors due to costly decision-making. Errors in the prices firms set help explain micro ‘puzzles’ relating to the sizes of price changes, the behaviour of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the ‘selection effect’.

Nathan Sussman, Osnat Zohar, 16 September 2015

The 2014 decline in oil prices lowered short-run inflation. Before the Global Crisis, the medium-term correlation between oil prices and inflation was weak, but it has become much stronger since the onset of the Crisis. This column suggests that following the onset of the Crisis, inflation expectations reacted quite strongly to global demand conditions and oil supply shocks. The public’s belief in the ability of monetary authorities to stabilise inflation at the medium-term horizon has deteriorated.

Andrew Levin, 11 September 2015

The Federal Reserve is on the verge of triggering the process of monetary policy tightening. This column argues that the rationale for that policy judgement rests on faulty analytical assumptions about the labour market, inflation dynamics, the stance of monetary policy, and the balance of risks to the economic outlook. What’s more, the current opacity of the FOMC’s near-term strategy is likely to exacerbate uncertainty and hinder the effectiveness of monetary policy in fostering the goals of maximum employment and price stability.

Paul De Grauwe, 07 September 2015

Economists were early critics of the design of the Eurozone, though many of their warnings went unheeded. This column discusses some fundamental design flaws, and how they have contributed to recent crises. National booms and busts lead to large external imbalances, and without individual lenders of last resort – national central banks – these cycles lead some members to experience liquidity crises that degenerated into solvency crises. One credible solution to these design failures is the formation of a political union, however member states are unlikely to find this appealing.

Thorsten Beck, José-Luis Peydró, 07 September 2015

The past five years have given European countries useful insights on what works in crisis resolution. The lessons should be viewed as forward-looking contributions to the institutional and policy reform agenda in Europe, especially in the Eurozone. The Eurozone is not doomed, it just needs better economic and financial policies.

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