Final Report Summary - MONPMOD (New Directions for Monetary Policy Analysis)
The project has delivered new theoretical models to understand and analyze the role of monetary policy in the aftermath of the financial crisis.
In “Safe Assets, Liquidity and Monetary Policy” published in the American Economic Journal Macroeconomics authored by P. Benigno and S. Nistico’ a model of coexistence between safe and pseudo-safe assets is analyzed showing that the worsening in the quality of pseudo-safe assets can generate a liquidity crunch and a contraction in aggregate demand and real activity. Monetary policy can counteract the crisis by issuing more safe assets, using reserves or money, and thereby avoiding the shortage of liquidity and the contraction in aggregate demand. The framework rationalizes as optimal policies the main monetary policy actions adopted during the recent crisis such as balance-sheet and zero-lower-bound policies focusing on different forces than those underlined by the literature.
The paper “Dynamic Debt Deleveraging and Optimal Monetary Policy” forthcoming in the American Economic Journal: Macroeconomics and authored by P. Benigno, G. Eggertsson and F. Romei, proposes a tractable post-crisis New-Keynesian model to understand the propagation mechanism of debt deleveraging to macroeconomic variables. The first main conclusion of the paper is that the duration of a negative natural rate of interest –the source of a liquidity trap-- is now endogenous depending on the speed of deleveraging and therefore on macroeconomic policy. The second key result of the paper is that endogenous deleveraging in general amplifies the effect of policy at the zero bound. A third result that emerges is that optimal monetary policy in a liquidity trap under dynamic deleveraging prescribes excess inflation, and possibly output above potential, well above the inflation target, even during the period in which the zero bound is binding and the natural rate of interest is negative.
The paper “Non-Neutrality of Open-Market Operations” forth coming in the American Economic Journal: Macroeconomics and authored by P. Benigno and S. Nistico analyses the effects on inflation and output of unconventional open-market operations due to the possible income losses on the central bank’s balance sheet. Three non-neutrality cases are investigated. First, with no treasury’s support, sizeable (current or expected) balance-sheet losses can undermine central bank’s solvency and should be resolved through an increase in inflation. Second, a central bank might also engineer higher inflation in the case it wants to limit or reduce losses because of political constraints or to seek more financial independence. Third, if the treasury is unable or unwilling to tax households to cover central bank’s losses, the wealth transfer to the private sector also leads to higher inflation.
The paper “A Central Bank Theory of the Price Level” This paper develops a theory in which the central bank can control the price level without fiscal backing. It is shown that the remittances' policy and the balance sheet of the central bank are important elements to specify. A central bank appropriately capitalized can succeed in controlling prices by setting the interest rate on reserves, holding short-term assets and rebating its income to the treasury.
The paper “Private Money Creation, Liquidity Crises and Government Intervention” authored by P.Benigno and R. Robatto and published in the Journal of Monetary Economics examines the joint supply of public and private liquidity when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to investing in low-risk projects always eliminates liquidity crises but reduces welfare.
In “Safe Assets, Liquidity and Monetary Policy” published in the American Economic Journal Macroeconomics authored by P. Benigno and S. Nistico’ a model of coexistence between safe and pseudo-safe assets is analyzed showing that the worsening in the quality of pseudo-safe assets can generate a liquidity crunch and a contraction in aggregate demand and real activity. Monetary policy can counteract the crisis by issuing more safe assets, using reserves or money, and thereby avoiding the shortage of liquidity and the contraction in aggregate demand. The framework rationalizes as optimal policies the main monetary policy actions adopted during the recent crisis such as balance-sheet and zero-lower-bound policies focusing on different forces than those underlined by the literature.
The paper “Dynamic Debt Deleveraging and Optimal Monetary Policy” forthcoming in the American Economic Journal: Macroeconomics and authored by P. Benigno, G. Eggertsson and F. Romei, proposes a tractable post-crisis New-Keynesian model to understand the propagation mechanism of debt deleveraging to macroeconomic variables. The first main conclusion of the paper is that the duration of a negative natural rate of interest –the source of a liquidity trap-- is now endogenous depending on the speed of deleveraging and therefore on macroeconomic policy. The second key result of the paper is that endogenous deleveraging in general amplifies the effect of policy at the zero bound. A third result that emerges is that optimal monetary policy in a liquidity trap under dynamic deleveraging prescribes excess inflation, and possibly output above potential, well above the inflation target, even during the period in which the zero bound is binding and the natural rate of interest is negative.
The paper “Non-Neutrality of Open-Market Operations” forth coming in the American Economic Journal: Macroeconomics and authored by P. Benigno and S. Nistico analyses the effects on inflation and output of unconventional open-market operations due to the possible income losses on the central bank’s balance sheet. Three non-neutrality cases are investigated. First, with no treasury’s support, sizeable (current or expected) balance-sheet losses can undermine central bank’s solvency and should be resolved through an increase in inflation. Second, a central bank might also engineer higher inflation in the case it wants to limit or reduce losses because of political constraints or to seek more financial independence. Third, if the treasury is unable or unwilling to tax households to cover central bank’s losses, the wealth transfer to the private sector also leads to higher inflation.
The paper “A Central Bank Theory of the Price Level” This paper develops a theory in which the central bank can control the price level without fiscal backing. It is shown that the remittances' policy and the balance sheet of the central bank are important elements to specify. A central bank appropriately capitalized can succeed in controlling prices by setting the interest rate on reserves, holding short-term assets and rebating its income to the treasury.
The paper “Private Money Creation, Liquidity Crises and Government Intervention” authored by P.Benigno and R. Robatto and published in the Journal of Monetary Economics examines the joint supply of public and private liquidity when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to investing in low-risk projects always eliminates liquidity crises but reduces welfare.