I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility.

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House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

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Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

https://web.stanford.edu/~johntayl/Papers/ISOM+revised+(EER).pdf

Low inflation, pass-through, and the pricing power of firms

Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.

Federal Reserve Bank of New Yorkの制定せる財務諸表様式について

В работе проверяется степень влияния валютного курса и цен импорта на колебания индекса цен потребителей и производителей (CPI и PPI) в некоторых развитых экономиках. Для оценки используется VAR-модель. Результат анализа показал, что в период после краха Бреттон-Вудской системы наблюдалось достаточно скромное влияние валютных курсов на уровень инфляции, в то время как цены импорта оказывали существенное воздействие на этот показатель. Кроме того, влияние курса на цены было сильнее в тех странах, в которых доля импорта больше. В период 1996-1998 гг. валютный курс и цены импорта играли важную роль в процессе дефляции во многих странах, чего, однако, нельзя сказать об экономике США.

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Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies

The strong rise in home prices since the mid-1990s has raised concerns over a possible bubble in the housing market and the effect of a sharp price decline on the U.S. economy. This article assesses two measures frequently cited to support a bubble - the rising price-to-income ratio and the declining rent-to-price ratio - and finds the measures to be flawed and the conclusions drawn from them unpersuasive. In particular, the measures do not fully account for the effects of declining nominal mortgage interest rates and fail to use appropriate home price indexes. The authors also estimate a structural model of the housing market and find that aggregate prices are not inconsistent with long-run demand fundamentals. Accordingly, they conclude that market fundamentals are strong enough to explain the recent path of home prices and that no bubble exists. Nevertheless, weakening fundamentals could have an impact on home values on the east and west coasts, where the new housing supply appears to be relatively inelastic. However, prices in these regions have typically been volatile, and previous declines have not had a sizable negative effect on the overall economy.

Are Home Prices the Next Bubble

This paper examines the impact of exchange rates and import prices on domestic PPI and CPI in selected industrialised economies. The empirical model is a VAR incorporating a distribution chain of pricing. Impulse responses and variance decompositions indicate that these external factors have a modest effect on domestic price inflation over the post-Bretton Woods era. The pass-through is somewhat stronger in countries with a larger import share. A historical decomposition over 1996-98 indicates, however, that external factors have had a sizable disinflationary effect in most of the countries during the past couple of years. Estimating the model using post-1982 data has little effect on these conclusions.

/pdf/pass-through-of-exchange-rates-and-import-prices-to-domestic-3z4hgrdq38.pdf

Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialised Economies

INTRODUCTION The volatility of residential investment has declined considerably since the mid- 1980s (Chart 1). The timing of this reduction in volatility corresponds to the timing of a fundamental restructuring of the housing finance system, from a heavily regulated system dominated by thrift institutions (savings and loans and mutual savings banks) to a relatively unregulated system dominated by mortgage bankers and brokers and the process of mortgage securitization. With this restructuring, the housing finance system is now integrated with the broader capital markets in the sense that "mortgage rates move in response to changes in other capital market rates, and mortgage funds are readily available at going market rates" (Hendershott and Van Order 1989). [GRAPHIC OMITTED] In light of this restructuring, it is certainly possible that the transmission of monetary policy to residential investment has changed. The supply of mortgage credit is now less likely to experience the sharp swings that occurred in the 1960s and 1970s. This, along with much greater competitiveness in the primary mortgage market prompted by deregulation, suggests that a tightening of monetary policy is less likely to result in nonprice rationing of mortgage credit, as was frequently the case under the old system. Our goal in this paper is to document any differences between the effects of changes in monetary policy on residential investment under the current and previous housing finance regimes. In the first half of the paper, we review the significant changes in the housing finance system over the past thirty years and discuss the implications of these changes for the cost and availability of mortgage credit. In the second half, we present a two-part econometric analysis of the transmission of changes in monetary policy to residential investment. The first part uses a small, reduced-form macroeconomic model to examine the response of the housing market to a monetary policy "shock." We then use a structural model of investment in single-family housing to examine the effect that the changes in the housing finance system have had on the housing market and on the response of that market to changes in monetary policy. Our main conclusion is that the eventual magnitude of the response of residential investment to a given change in monetary policy is similar to what it has been in the past. However, that response does not occur as quickly as it did under the old housing finance system and its timing is now similar to that of the overall economy. EVOLUTION OF THE HOUSING FINANCE SYSTEM The housing finance system can be thought of as three interrelated but distinct markets: the primary mortgage market, the secondary mortgage market, and the market for mortgage-backed securities (MBSs). Over the past thirty years, the underlying institutional setting of those markets has changed dramatically in response to macroeconomic conditions, deregulation, and financial and technological innovation. This section reviews those changes and discusses their implications for the cost and availability of mortgage credit. Trends in the Primary Mortgage Market The primary mortgage market is where homeowners (mortgagors) borrow from mortgage lenders (originators), pledging their home as collateral for the debt. The debt instrument created in this transaction is typically referred to as a whole loan. Thirty years ago, the primary market was dominated by the heavily regulated thrift industry. Today, it is dominated by the relatively unregulated mortgage banking industry. As recently as the 1970s, the primary mortgage market had essentially the same structure as the one created during the 1930s, often referred to as the New Deal system. (1) Under that system, thrifts gathered primarily local time deposits and made long-term fixed-rate mortgage loans on residential properties located near their home offices, (2) which were then held in the thrift's portfolio. …

/pdf/monetary-policy-transmission-to-residential-investment-1237mz06sr.pdf

Monetary Policy Transmission to Residential Investment

To what extent can information-technology led improvements in inventory management account for the apparent moderation of economic fluctuations in the United States since the mid-1980s? We argue that changes in inventory dynamics played a reinforcing—rather than a leading—role in the reduction of output volatility. Since the mid-1980s, inventory dynamics have changed in a manner consistent with a faster resolution of inventory imbalances. However, these changes appear to be a consequence of changes in the response of industry-level sales and aggregate economic activity to monetary policy shocks. Our results suggest that it is the interaction between the changes in inventory behavior at the industry level and the macroeconomic environment—where the latter likely includes changes in the conduct of monetary policy and the responses of the economy to policy disturbances—rather than any single factor, that has contributed importantly to the observed decline in economic volatility.

/pdf/inventory-dynamics-and-business-cycles-what-has-changed-jun4avw9xe.pdf

Jonathan McCarthy

Papers

Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies

Are Home Prices the Next Bubble

Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialised Economies

Monetary Policy Transmission to Residential Investment

Inventory Dynamics and Business Cycles: What Has Changed?