Staff Working Papers
The Implications of Transmission and Information Lags for the Stabilization Bias and Optimal DelegationIn two recent papers, Jensen (2002) and Walsh (2003), using a hybrid New Keynesian model, demonstrate that a regime that targets either nominal income growth or the change in the output gap can effectively replicate the outcome under commitment and hence reduce the size of the stabilization bias.
Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium FrameworkIn an era when the primary policy instrument is the level of the short-term interest rate, a comparison of that rate with some equilibrium rate can be a useful guide for policy and a convenient method to measure the stance of monetary policy.
Using a closed-economy model, Jensen (2002) and Walsh (2003) have, respectively, shown that a policy regime that optimally targets nominal income growth (NIT) or the change in the output gap (SLT) outperforms a regime that targets inflation, because NIT and SLT induce more inertia in the actions of the central bank, effectively replicating the outcome obtained under precommitment. The author obtains a very different result when the analysis is extended to open-economy models.
One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output.