Monetary Empirics

Question 1

Ratex

Answer 1

Muth, 1961

Question 2

Do we see ratex?

Answer 2

De Bondt and Bange, 1992: Random walk (adaptive) outperforms expectations pre 1979!
Dias, Duarte, Rua (2008): Consumers underpredict inflation consistently!

Question 3

PIP original?
- does it hold?

Answer 3

Sargent and Wallace (1975)
Doesn’t hold. Mishkin (1982) rejects H0 of anticipated changes having no effect.
Aniticipated changes roughly 15-25% of fluctuations in medium term output!
Milani and Treadwell (2012)

Question 4

Inflation bias

Answer 4

Barro Gordon Model, 1983

Question 5

Empirics on inflation bias

Answer 5

Surico, 2008: Fed inflation bias of 0.8 to 1% 1960-79 disappears upon independence
Ireland, 1999: US data consistent with model!

Question 6

Solution: Commitment

Answer 6

Orphanides and Williamson, 2005. No inflation bias, Var(Y) up as supported by Ceccheti and Ehrman, 2002.
In reality, this is generally flexible (Ball and Sheridan).

Question 7

Solution: Delegation

Answer 7

Conservative
- (Rogoff, 1985): Weightings on gaps.
- (Svensson, 1997): Lower inflation target
Responsible
- (Blinder, 1997): Ystar = Ybar. CB independence means less influenced by politics so less inflation to overstate output potential (Haldane, 2000)

Question 8

Reputation and inflation bias

Answer 8

Temptation to exploit PC is ‘illusory’ if repeated game (Howitt, 2001). Chooses to play SPNE (Briault et al,1996)
More long term/ repetitions of game if independent vs politicians

Question 9

Incentive contracts

Answer 9

Walsh, 1995
Non credible (Bofinger, 2001): NZ CB not dismissed in 1995/6

Question 10

Pros and cons of independence

Answer 10

Mishkin 2021
Avoid pol business cycle / PA problem for politicians
Coordination of MPFP issues and theory of bureaucratic behaviour

Question 11

Issue with Quantity theory

Answer 11

V is procyclical (Gould and Nelson, 1974)

Question 12

Inventory theory (Baumol, Tobin). Paid in bonds, which can be converted to cash.

Answer 12

Shows elasticity to be i =-1/2, Y = 1/2 by optimization , but in fact =0.86 and -0.022,
(Mark and Sul, 2003) of OECD countries

Question 13

Money multiplier in history and GD

NB: This is also useful for evidence AGAINST RBC theory as it implies that non real shocks are important!

Answer 13

Generally fairly constant, although collapse in crises (esp when gov tries to exploit it)
Friedman and Schwartz (1963): Money multiplier collapse 3.7 to 2.3 contributed to GD!

Question 14

UK interest rate corridor:

Answer 14

+- 25bp on iBR target.
Currently at 4.84%

Question 15

ZLB?

Answer 15

Empirically disproven following financial crises 2 year, 10 year in Japan and Switzerland!

Question 16

Secular stagnation

Answer 16

Low growth / I opportunities! Low interest rates are not some golden pill for investment

Question 17

Dividend irrelevance?

Answer 17

Modigliani and Miller, 1958
Equity/ share more relevant!

Question 18

Efficient markets?

Answer 18

Fama, 1970.
Weak, strong, semi-strong

Question 19

LR mean reversion of stock prices

Answer 19

Fama and French 1988: Suggest 25-40% of price changes predictable

Question 20

January/ small firm effect

Answer 20

Stocks rise the most in January (largely due to accounting / tax reasons, but this should be ‘priced in’)
Keim(1986) / Reinganum (1983)

Question 21

Overreaction to news

Answer 21

De Bondt and Thaler, 1987: Bubble formation

Question 22

Agents only collect info until MB = MC?

Answer 22

Grossman and Stiglitz, 1980

Question 23

BB model

Answer 23

Bernanke Blinder, 1980

Question 24

BB evidence

Answer 24

Credit channel is important! E.g. small firms are hurt more than large firms by contractionary MP (financial Eos) (asymmetric info is key)

Question 25

BB evidence

Answer 25

Credit channel is important! E.g. small firms are hurt more than large firms by contractionary MP (asymmetric info is key)

Question 26

Seignorage crises

Answer 26

Zim 2007-08 / Venez 2018-19

Question 27

Bank run example

Answer 27

Hong Kong, 1991

Question 28

Yield curve as a recession indicator

Answer 28

Relies on expectations theory / liquidity preference. Inverted indicates expectations of lower i (Expansionary MP in future)
Also, E(stock prices down/ variance up) so movement into safe haven assets (long term bonds)

Question 29

Risk premium in YC?

Answer 29

Risk premium gets in the way of expectations theory (Mishkin, 2021)
Can’t just use ex post as expectational errors too large so Peacock (2004) uses surveys to back out!

Question 30

Probit models for YC

Answer 30

Estrella and Mishkin 1996 / Estrella Turbin 2006:
Strongest indicator if more than two quarters ahead!

Question 31

Near term forward spread

Answer 31

3 month vs 18 months
Engstrom and Sharp, 2018:
Statistically dominant!

Question 32

Considerations of YC and recession indication

Answer 32

High / variable inflation may make it hard to extract expectations.
Lucas critique

Question 33

YC as indicator of MP predictability

Answer 33

Large, sudden YC changes indicate unexpected MP (Haldane and Reed, 1999): Inflation targeting most stable

More predictive power over recessions if SRir is predictable (Gerlach, Smetz 1997)

Question 34

ZLB and YC?

Answer 34

Flatter due to QE so loss of some predictive power and also less indicative of pure expectations!
Tomlinson (2013): YC held in ‘suspended animation’
Chinn and Kucko (2015): Model fit of YC to Japanese data has worsened!

Question 35

CB uncertainty so cautious MP?

Answer 35

Brainer, 1967: Cautionary principle

Question 36

Size of excess reserves and so effect on multiplier

Answer 36

Very small (Mishkin, 2021)