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"Should central banks, because of the zero-lower-bound problem, raise their inflation-rate targets? Several arguments are relevant. (1) In the absence of the ZLB, the optimal steady-state inflation rate, according to standard New Keynesian reasoning, lies between the Friedman-rule value of deflation at the steady-state real interest rate and the Calvo-model value of zero, with calibration indicating a larger weight on the latter. (2) An attractive modification of the Calvo pricing equation would, however, imply that the weight on the second of these values should be zero. (3) There may be some scope for activist monetary policy to be effective even when the one-period interest rate is at the ZLB; but there is professional disagreement on this matter. (4) Present institutional arrangements are not immutable. In particular, elimination of traditional currency is feasible (even arguably attractive) and would remove the ZLB constraint on policy. (5) Increasing target inflation for the purpose of avoiding occasional ZLB difficulties would tend to undermine the rationale for central bank independence and would constitute an additional movement away from policy recognition of the economic necessity for intertemporal discipline"--National Bureau of Economic Research web site

"So-called 'spurious regression' relationships between random-walk (or strongly autoregressive) variables are generally accompanied by clear signs of severe autocorrelation in their residuals. A conscientious researcher would therefore not end an investigation with such a result, but would likely re-estimate with an autocorrelation correction. Simulations show, for several typical cases, that the test-rejection statistics for the re-estimated relationships are very close to the true values, so do not yield results of the spurious type"--National Bureau of Economic Research web site

"This paper compares the P-bar model of price adjustment with the currently dominant Calvo specification. Theoretically, the P-bar model is more attractive as it depends upon adjustment costs for physical quantities rather than nominal prices, while incorporating a one-period information lag. Furthermore, the resulting adjustment relation is more completely free of "money illusion," in terms of dynamic relationships, and therefore satisfies the natural rate hypothesis of Lucas (1972), which is not satisfied by the Calvo model in any of its variants. Along the way, it shows that both the P-bar and Calvo models can be formulated in distinct versions in which current real wages are, or are not, allocative. Quantitatively, for a given calibration of the demand parameters, the implied time series properties of the inflation rate, output gap, and nominal interest rate are determined for various policy parameters, and are compared with quarterly data for the U.S. economy. Neither model dominates but, overall, the comparison seems somewhat more favorable to the P-bar model and certainly does not provide support for the dominant position held by the Calvo model in current monetary policy analysis"--National Bureau of Economic Research web site

"In a very broad class of dynamic linear models, if agents possess knowledge of current endogenous variables in a least-squares learning process, determinacy of a rational expectations (RE) equilibrium is sufficient but not necessary for learnability of that equilibrium. Thus, since learnability is an attractive necessary condition for plausibility of any equilibrium, there may exist a single plausible RE solution even in cases of indeterminacy. This paper proposes and outlines a distinct criterion that plausible models should possess, termed "well formulated" (WF), which rules out infinite discontinuities in the implied impulse response functions. The paper explores the relationship between this WF property and learnability, under the information assumption mentioned above, and finds that they often agree but neither strictly implies the other. Extending the P-matrix requirement, implied for specified matrices by the WF property, to one that demands positive dominant-diagonal matrices would guarantee both WF and learnability, but a suitable rationale has not been found. Finally, under a second information assumption, which gives the agents only lagged information on endogenous variables during the learning process, the situation is less favorable in the sense that learnability can be guaranteed only under special assumptions"--National Bureau of Economic Research web site

This brief article corrects or refines a few details about the work and career of John F. Muth and his involvement in the creation of rational expectations.

AbstractThis paper develops three considerations relevant to the possibility of modification of the Hong Kong currency board system for conducting monetary/exchange‐rate policy. The first concerns the system employed by Singapore, an economy similar in several ways to Hong Kong's, whereby the exchange rate is adjusted periodically in activist response to inflation and output developments. The second concerns a generalization, one that calls for adjustments of a weighted average of exchange rate and interest rate instruments, so designed to be effective whether the economy is, or is not, in a liquidity‐trap situation. Finally, the third topic concerns political‐economy aspects of policy, which tend to incline against the use of the activist systems.