Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-22T18:19:13.443Z Has data issue: false hasContentIssue false
  • English
  • Français

What are the Right Models and Policies for a World of Low Inflation?

Published online by Cambridge University Press:  26 March 2020

Patrick Minford
Patrick Minford*
Affiliation:
Cardiff UniversityUK
Get access Rights & Permissions [Opens in a new window]

Abstract

Monetary policy should be guided by macroeconomic models with limited nominal rigidity; ‘New Classical’ or even for some issues just plain Classical (i.e. with no nominal rigidity at all) models are perfectly adequate for understanding various aspects of the economy that have previously led economists to believe in a high degree of nominal rigidity. On UK data these models account for the facts of inflation persistence and exchange rate ‘overshooting’; their impulse responses are in line with the data; and a typical example, the Liverpool Model, is marginally accepted in its entirety by the data since 1979. Such models suggest that no increased macro instability would result from taking the rigours of monetary policy one stage further from inflation targeting and ensuring that the price level itself is returned to its long-run preset target path — so that the value of money over long periods of time would be utterly predictable.

Keywords

Nominal rigidityclassicalnew classicalbootstrappingimpulse responsesvector autoregressionMarkov switchingmonetary regimesE31E32E37E52
Type
Articles
Information
National Institute Economic Review , Volume 196 , 01 April 2006 , pp. 92 - 106
Copyright
Copyright © 2006 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aoki, K. and Nikolov, K. (2004), ‘Rule-based monetary policy under central bank learning’, Bank of England Working Paper No. 235, October.CrossRefGoogle Scholar
Bank of Canada (1994), Economic Behaviour and Policy Choice under Price stability, Ottawa.Google Scholar
Barrell, R. and Dury, K. (2000), ‘An evaluation of monetary targeting regimes’, National Institute Economic Review, 174, October, pp. 105–13.CrossRefGoogle Scholar
Barro, R. (1977), ‘Long-term contracting, sticky prices and monetary policy’, Journal of Monetary Economics, 3, pp. 305–16.CrossRefGoogle Scholar
Bordo, M.D. and Filardo, A.J. (2004), ‘Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?’, NBER Working Paper No. W10833, October.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M. and Evans, C. (2002), ‘Nominal rigidities and the dynamic effects of a shock to monetary policy’, Working paper 0107, Federal Reserve Bank of Cleveland.CrossRefGoogle Scholar
Dornbusch, R. (1976), ‘Expectations and exchange rate dynamics’, Journal of Political Economy, 84, pp. 1161–76.CrossRefGoogle Scholar
Duguay, P. (1994), ‘Some thoughts on price stability versus zero inflation’, Working paper, Bank of Canada – presented at the conference on Central Bank Independence and Accountability, Universita Bocconi, Milan, March.Google Scholar
Fischer, S. (1977), ‘Wage indexation and macroeconomic stability’, in Brunner, K. and Meltzer, A. (eds), Stabilization of the Domestic and International Economy, Carnegie-Rochester Conference Series on Public Policy, Amsterdam, North-Holland.CrossRefGoogle Scholar
Fischer, S. (1995), ‘Modern central banking’, in Capie, F.et al., The Future of Central Banking, Cambridge University Press.Google Scholar
Gillman, M. and Kejak, M. (2005), ‘Inflation and balanced-path growth with alternative payment mechanisms’, Economic Journal, 115, 500 (January), pp. 247–70.CrossRefGoogle Scholar
Gray, J. (1976), ‘Wage indexation: a macroeconomic approach’, Journal of Monetary Economics, 2, pp. 221–35.CrossRefGoogle Scholar
Hall, R.E. (1984), ‘Monetary strategy with an elastic price standard’, in Price Stability and Public Policy, Federal Reserve Bank of Kansas City, Kansas City, pp. 137–59.Google Scholar
Le, V.P.M. and Minford, P. (2005), ‘Calvo contracts – optimal indexation in general equilibrium’, mimeo, Cardiff University, available on http://www.cf.ac.uk/carbs/econ/webbbd/pm.html.Google Scholar
Lucas, R.E. (Jr) (1973), ‘Some international evidence on outputinflation trade-offs’, American Economic Review, 68, pp. 326–34.Google Scholar
Lucas, R.E. (Jr) (2000), ‘Inflation and welfare’, Econometrica, 68(2), pp. 247–74.CrossRefGoogle Scholar
Minford, P., Nowell, E. and Webb, B. (2003), ‘Nominal contracting and monetary targets – drifting into indexation’, Economic Journal, January, 113, pp. 65–100.CrossRefGoogle Scholar
Minford, P., and Peel, D. (2003), ‘Optimal monetary policy – is price-level targeting the next step?’ Scottish Journal of Political Economy, November, 50(5), pp. 650–67.CrossRefGoogle Scholar
Minford, P., and Peel, D. (2004), ‘Calvo contracts – a critique’, mimeo, Cardiff University, available on http://www.cf.ac.uk/carbs/econ/webbbd/pm.html.Google Scholar
Minford, P., Sofat, P., Nowell, E. and Srinivasan, N. (2005), ‘UK inflation persistence: policy or nature?’, mimeo, Cardiff University, available on http://www.cf.ac.uk/carbs/econ/webbbd/pm.html.Google Scholar
Minford, P., Theodoridis, K. and Meenagh, D. (2005), ‘A bootstrap test for the dynamic performance of macroeconomic models – an outline and some experiments,’ mimeo, Cardiff University, available on http://www.cf.ac.uk/carbs/econ/webbbd/pm.html.Google Scholar
Minford, P. and Webb, B. (2005), ‘Estimating large rational expectations models by FIML – a new algorithm with bootstrap confidence limits’, Economic Modelling, 22(1), January, pp. 187–205.CrossRefGoogle Scholar
Smets, F. (2000), ‘What horizon for price stability?’, European Central Bank working paper no. 24, July, ECB, Frankfurt.Google Scholar
Sofat, P., Minford, P., Nowell, E. and Meenagh, D. (2005), ‘Real exchange rate overshooting RBC style’, mimeo, Cardiff University, available on http://www.cf.ac.uk/carbs/econ/webbbd/pm.html.Google Scholar
Svensson, L.E.O. (1999a), ‘Price level targeting versus inflation targeting: a free lunch?’, Journal of Money Credit and Banking, 31(3), August, pp. 277–95.CrossRefGoogle Scholar
Wallis, K.F. (1995), ‘Large-scale macroeconometric modelling’, in Pesaran, H. and Wickens, M. (eds), Handbook of Applied Econometrics, Blackwell.Google Scholar
Walsh, C.E. (1995), ‘Optimal contracts for central banks’, American Economic Review, 85, pp. 150–67.Google Scholar
Williams, J.C. (1999), ‘Simple rules for monetary policy’, mimeo, Federal Reserve Board, February 1999, Washington D.C.CrossRefGoogle Scholar