Borrowing Constraints, Multiple Equilibria and Monetary Policy

The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In the original model, however, all the variables, credit included, are in real terms. In order to assess the impact of monetary policy the model must be reformulated to fit a monetary economy. In the present paper we model a monetary economy with financing constraints adopting the Money In the Utility function (MIU) approach.The occurrence of multiple equilibria is a likely outcome of the dynamics generated by the model. A change in the growth rate of money supply can affect real out- put through the impact of inflation on net worth. In a sense the monetary transmission mechanism we are focusing on consists of a combination of the inflation tax effect and the net worth channel. Contrary to the traditional view, at least for some parameter restrictions, an increase of the inflation tax can bring about an increase of aggregate output.

Was Bernanke Right? Targeting Asset Prices may not be a Good Idea after all

Should the central bank prevent “excessive” asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene only afterwards? The debate over this issue goes back at least to the exchange between Bernanke-Gertler (BG) and Cecchetti but has not settled yet. In their 1999 paper BG claimed that price stability and financial stability are ‘highly complementary and mutually consistent objectives’ in a flexible inflation targeting regime which ‘dictates that central banks ... should not respond to changes in asset prices, except insofar as they signal changes in expected inflation.’ (BG, 1999, p.18). This conclusion is straightforward within the variant of the NK-DSGE framework used by BG in which asset inflation shows up as a factor ‘augmenting’ the IS curve. In the present paper, we pursue a different modelling strategy so that, in the end, asset price dynamics will be incorporated into the NK Phillips curve. In our context it is not true anymore that by focusing on inflation the central bank is also checking an asset price boom. We put ourselves, therefore, in the best position to obtain a significant stabilizing role for asset price targeting. It turns out, however, that inflation volatility is higher in the asset price targeting case. After all, therefore, targeting asset prices may not be a good idea.cost channel, asset prices, Taylor rules

Asset Prices and Monetary Policy: A New View of the Cost Channel

Should the central bank act to prevent "excessive" asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene afterwards to attenuate the fallout on the real economy? The standard "three equation" New Keynesian framework is inadequate to analyse this issue for the very simple reason that asset prices are not explicitly included in the model. There are two straightforward ways to take into account asset price dynamics in this framework. First of all, the objective function of the central bank - usually defined in terms of inflation and the output gap - could be "augmented" to take into account asset price inflation. Second, expected asset price inflation can affect the IS curve through a wealth effect. In this paper we follow a different route. In our model in fact, the expected asset price dynamics will be eventually incorporated into the NK Phillips curve. This is due to the assumption of a cost channel for monetary policy which is activated whenever monetary policy affects asset prices and dividends. In fact they determine the cost of external finance in the simple "equity only" financing model we consider, abstracting for simplicity from internal funds and the credit market.

Barriers and drivers to energy efficiency? A New taxonomical approach

This paper develops a new systematic classification and explanation of barriers and drivers to energy efficiency. Using an `actor oriented approach', the paper tries to identify (i) the drivers and barriers that affect the success or failure of energy efficiency investments and (ii) the institutions that are responsible for the emergence of these barriers and drivers. This taxonomy aims to synthesise ideas from three broad perspectives, viz., micro (project/end user), meso (organization), and macro (state, market, civil society). The paper develops a systematic framework by looking at the issues from the perspective of different actors. This not only aids the understanding of barriers and drivers; it also provides scope for appropriate policy interventions. This focus will help policy-makers evaluate to what extent future interventions may be warranted and how one can judge the success of particular interventions.

Interest Rate Rules with Heterogeneous Expectations

Recent macroeconomic literature stressed the importance of expectations heterogeneity in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate the dynamical consequences of alternative interest rate rules when agents have heterogeneous expectations and update their beliefs over time along the lines of Brock and Hommes (1997). We find that the outcome of different monetary policies in terms of stability crucially depends on the ecology of forecasting rules and on the intensity of choice among different predictors. We also show that, when agents have heterogeneous expectations, an interest rate rule that obeys the Taylor principle does not always lead the system to converge to the rational expectations equilibrium but multiple equilibria may persist.

Individual Expectations and Aggregate Macro Behavior

The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. We find that a more aggressive monetary policy that sets the interest rate more than point for point in response to inflation stabilizes inflation in our experimental economies. We use a simple model of individual learning, with a performance-based evolutionary selection among heterogeneous forecasting heuristics, to explain coordination of individual expectations and aggregate macro behavior observed in the laboratory experiments. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behavior and oscillatory convergence. A simple heterogeneous expectations switching model fits individual learning as well as aggregate outcomes and outperforms homogeneous expectations benchmarks.

The Great Climate Debate - A Developing Country Perspective

For over two decades, scientific and political communities have debated whether and how to act on climate change. The present paper revisits these debates and synthesizes the longstanding arguments. Firstly, it provides an overview of the development of international climate policy and discusses clashing positions represented by sceptics and supporters of action on climate change. Secondly, it discusses the market-based measures as a means to increase the win-win opportunities and to attract profit-minded investors to invest in climate change mitigation. Finally, the paper examines whether climate protection policies can yield benefits both for the environment and the economy. The paper suggests the possibility of building environmental and climate policies around development priorities that are vitally important for developing countries and stresses the need for using sustainable development as a framework for climate change policies.Climate change, Sceptic, Supporter, Developing country

Barriers and Drivers to Energy Efficiency - A new Taxonomical Approach

This paper develops a new systematic classification and explanation of barriers and drivers to energy efficiency. Using an actor oriented approach, the paper tries to identify (i) the drivers and barriers that affect the success or failure of energy efficiency investments and (ii) the institutions that are responsible for the emergence of these barriers and drivers. This taxonomy aims to synthesise ideas from three broad perspectives, viz., micro (project/end user), meso (organization), and macro (state, market, civil society). The paper develops a systematic framework by looking at the issues from the perspective of different actors. This not only aids the understanding of barriers and drivers; it also provides scope for appropriate policy interventions. This focus will help policy-makers evaluate to what extent future interventions may be warranted and how one can judge the success of particular interventions.Energy Efficiency, Taxonomical Approach

Credit Cycles in a OLG Economy with Money and Bequest

In this paper we develop an extended version of the original Kiyotaki and Moore's model ("Credit Cycles" Journal of Political Economy, vol. 105, no 2, April 1997)(hereafter KM) using an overlapping generation structure instead of the assumption of infinitely lived agents adopted by the authors. In each period the population consists of two classes of heterogeneous interacting agents, in particular: a financially constrained young agent (young farmer), a financially constrained old agent (old farmer), an unconstrained young agent (young gatherer), an unconstrained old agent (old gatherer). By assumption each young agent is endowed with one unit of labour. Heterogeneity is introduced in the model by assuming that each class of agents use different technologies to pro- duce the same non durable good. If we study the effect of a technological shock it is possible to demonstrate that its effects are persistent over time in fact the mechanism that it induces is the reallocation the durable asset ("land")among agents. As in KM we develop a dynamic model in which the durable asset is not only an input for production processes but also collateralizable wealth to secure lenders from the risk of borrowers'default. In a context of intergenerational altruism, old agents leave a bequest to their offspring. Money is a means of payment and a reserve of value because it enables to access consumption in old age. For simplicity we assume that preferences are defined over consumption and bequest of the agent when old. Money plays two different and contrasting roles with respect to landholding. On the one hand, given the bequest, the higher the amount of money the young wants to hold, the lower landholding. On the other hand the higher the money of the old, the higher the resources available to him and the higher bequest and landholding. We study the complex dynamics of the allocation of land to farmers and gatherers - which determines aggregate output - and of the price of the durable asset. If a policy move does not change the ratio of money of the farmer and of the gatherer, i.e. if the central bank changes the rates of growth of the two monetary aggregates by the same amount, monetary policy is superneutral, i.e. the allocation of land to the farmer and to the gatherer does not change, real variables are unaffected and the only e¤ect of the policy move is an increase in the rate of inflation, which is pinned down to the (uniform) rate of change of money, and of the nominal interest rate. If, on the other hand, the move is differentiated, i.e. the central bank changes the rates of growth of the two monetary aggregates by different amounts so that the rates of growth are heterogeneous, money is not superneutral, i.e. the allocation of land changes and real variables are permanently affected, even if the rates of growth of the two aggregates go back to the original value afterwardsCredit Cycles, monetary policy

"Credit Cycle" in an OLG Economy with Money and Bequest

In the late '90s Kiyotaki and Moore (KM) put forward a new framework (Kiyotaki and Moore,1997) to explore the Financial Accelerator hypothesis. The original model was framed in an Infinitely Lived Agent context (ILA-KM economy). As in KM we develop a dynamic model in which the durable asset ("land") is not only an input but also collateralizable wealth to secure lenders from the risk of borrowers' default. In this paper, however, we model an OLG-KM economy whose novel feature is the role of money as a store of value and of bequest as a vehicle of resources to be "invested" in landholding. The dynamics generated by the model are complex. Not only cyclical patterns are routinely generated but the periodicity and amplitude are irregular. A route to chaotic dynamics is open.