美国经济学essay

Unanticipated Negative Demand And Supply Shocks Economics Essay
 

There appears to be considerable agreement among researchers and policymakers regarding ways to avoid the zero lower bound and minimize the risk of hitting it. Many recommendations have been put forward including positive symmetric inflation targets which act as buffers, and forward-looking policies which enable pre-emptive actions based on forecasts. Svensson (2003) even suggests that a set of emergency measures to be prepared and declared in advance, which can be used at pre-announced indications of an imminent liquidity trap. However on the subject of how to escape from a liquidity trap there is no such consensus. There are a multitude of practical proposals to climb out of a liquidity trap: taxes on money to lower the ZLB on interest rates, money transfers to the private sectors, open market purchases, and writing options to establish a ceiling on long-term interest rates. In this paper we explore some of the main issues with formulating and implementing monetary policy in a liquidity trap, and for the sake of brevity, we discuss only proposals which appear to be the especially promising among those which exclusively use monetary instruments.

 

When interest rates are immobilised at zero, what can the central bank do to battle deflationary pressures? The ‘reflex’ theoretical answer is that it can expand the monetary base via open-market operations in Treasury bills and more unconventional assets (Benhabib, Schmitt-Grohé and Uribe, 2002; Bernanke, 2000; Clouse et al., 2003; Meltzer (2001); Orphanides and Wieland, 2000). However this is ineffective because short-term bills and base money become approximate substitutes at the ZLB and open-market purchases have no direct effect on the public's wealth. The fall in the value of the public’s holdings of Treasury debt will compensate for their increased holding of the monetary base, and since the nominal rate cannot be reduced any further there is no potential for future capital gains through Treasury bill holdings. The effects of open market operations on liquidity are limited because they do not change the actual sum of Treasury bills and reserves (now approximate substitutes) being held, only its composition. Moreover, in cash-in-advance, money-in-the-production-function, money-in- the-utility-function, shopping-time models of money demand, the marginal value of liquidity is given by the nominal interest rate (Clouse et al 2003) so when the latter is frozen at zero, open market operations do not produce any marginal benefit from additional liquidity and therefore have no effect on aggregate demand.

 

‘Unconventiona;’ monetary policy such as open-market purchases of unorthodox assets such as long-maturity treasury bonds that do not promise the same (state-contingent) returns as money could still stimulate aggregate demand by reducing the relative supply of assets with a preferred maturity and decreasing the risk premium in the interest rate on those assets. However the empirical evidence on these ‘portfolio effects’ has been mixed: although previous studies of Operation Twist and similar alterations to the maturity composition of the government debt suggested negligible effects on risk premiums (Holland 19690. However, more recently Bernanke, Reinhaart and Sack (2004) offered evidence from event study analysis that large changes in the relative supplies of securities may have significant effects on their yields.

 

Even if the nominal interest rate is frozen at ZLB the central bank can influence the real rate if it can affect inflation expectations. If the private sector believes that the central bank will keep interest rates low (and prices high) even after deflationary pressures subside, the real rate will fall and this stimulates aggregate demand. Therefore the key to effective monetary policy when at the ZLB is the management of higher inflation expectations. [2] Committing to maintaining lower nominal rates for any given price level in the future should generate higher inflation expectations, lower real rates and a milder recession during the liquidity trap (see Krugman, 1998; Reifschneider and Williams, 2000; Eggertsson and Woodford, 2003; Jung, Teranishi and Watanabe, 2005; Adam and Billi, 2006).

 

However, beliefs about inflation in the private-sector are not easy to manipulate. The central bank’s promises of high future price levels may not be seen as credible by the private sector agents who may doubt the ability or the intention of the central bank to generate inflation in the future. This is a classical dynamic inconsistency problem: the central bank may promise high future inflation to get out of the liquidity trap, but once out it will be tempted to renege on the promise and keep prices low by raising interest rates – investors know this and will discount any promises the central bank makes in the first place. This is aggravated by the fact that the deflationary shocks that give rise to this problem are so rare that it is difficult for a central bank to develop a reputation for dealing with them competently.

 

In relation to this, Eggertsson and Woodford (hereafter E&W) (2003) put forward the irrelevance proposition that for a given policy rule in operation at the ZLB, in the model’s rational-expectations equilibrium quantitative easing has no effect on the deflationary price-level path [3] . This is because if the public perceives the target as price stability, the use of a Taylor rule implies a reversal of expansionary policy when deflationary pressures recede. Since many central banks openly follow the Taylor rule, the public will expect an interest rate hike as soon as inflation forecasts exceed the implicit target. Krugman (1998) explores monetary expansion in the form of an increased future money supply. Theoretically unlimited purchases of domestic and foreign government debt and assets could increase the monetary base infinitely. However once again we face the problem of time inconsistency: when the economy is in a liquidity trap and the interest rate is fixed at zero, the demand for monetary base is perfectly elastic and any excess liquidity can be easily absorbed by the private sector. However, once we escape and face a positive nominal rate the demand for money will shrink drastically, and this will motivate the central bank to pursue radical reduction of the monetary base. Increasing the money supply is thereof impotent if the public expects it to revert to some constant value when the deflationary pressures abate. Eggertsson (2006) shows more generally that a discretionary central bank which minimises a standard loss function depending on inflation and output gap, always has an incentive ex-post to renege on its inflation promise in order to achieve low inflation. 0

 

The verdict from these irrelevance results is that monetary policy is most effective if it can influence inflation expectations. Auerbach and Obstfeld (2005) show that the adoption of a new policy rule at ZLB - either in the form of a one-time jump in the base path or an increase in its slope (the rate of growth) – which enables the monetary expansion to be perceived as permanent can raise inflation expectations and reduce the real rate. However the question remains of how the central bank can develop and implement a credibly permanent policy for monetary expansion, and effectively signal this commitment to the private sector. For the rest of this paper we therefore evaluate the effectiveness of monetary policy proposals in raising inflation expectations on the basis of the credibility and verifiability of their commitment being permanent during and after the deflationary period.

 

Svensson (2001), Eggertsson (2003), Bernanke (2003), E&W (2003) and Wolman (2005) propose an announcement of an upward-sloping target path which, in accordance with the optimality of future overshooting, should be constructed with a price gap such that the path begins higher than the current point and then rises at 1–2% every year. If a central bank undershoots inflation in one year, it must compensate for it though higher inflation in future years in order to return to the intended price-level trajectory, leaving expectations of long-term average inflation unaffected. Long-term expectations are often more important because, as E&W (2003) emphasise, it is the expected future path of short-term real rates which affects aggregate demand, i.e. spending and investment decisions are based upon long-term real rates. Moreover, if deflation pushes the price level further below the target, inflation expectations will rise in order to get back on the target path, automatically lowering the real rate even if the nominal rate is frozen at ZLB. [4]