interest and prices.pptVIP

INTEREST AND PRICES MICHAEL WOODFORD FEATURES: Forward looking Price is not a function of i; rather , a function of the feedback rule and the target suppose Additionally: If Note, also that Big Small The path of the money supply: III. TAYLOR (feedback) RULE Steady state Optimizing models with nominal rigidities Chapter 3 Taylor principle: Is predetermined Transitory fluctuations in Create transitory fluctuations in Permanent shifts in the price level P. First Order Conditions: * FLEX-PRICE, COMPLETE-MARKETS MODEL MICROFOUNDED CAGAN-SARGENT PRICE LEVEL DETERMINATION UNDER MONETARY TARGETING Complete Markets = price kernel Value of portfolio with payoff D Interest coefficient for riskless asset Riskless Portfolio Budget Constraint Where T is the transfer payments based on the seignorage profits of the central bank, distributed in a lump sum to the representative consumer No Ponzi Games: For all states in t+1 For all t, to prevent infinite c The equivalent terminal condition Lagrangian Transversality condition: Flow budget constraint: Market Equilibrium Market solution for the transfers T Monetary Targeting: BC chooses a path for M Fiscal policy assumed to be: Equilibrium is S.t. Euler-intertemporal condition condition FOC-itratemporal condition TVC Constraint For given We study equilibrium around a zero-shock steady state: Derive the LM Curve From the FOC: At the steady state: Separable utility : Define: The “hat” variables are proportional deviations from the steady state variables. Similar to Cagan’s semi-elasticity of money demand We log-linearize around zero inflation define Log-linearize the Euler Equation and transform it to a Fisher equation: Elasticity of intertemporal substitution g is the “twist” in MRS between m and c Add the identity We look for solution given exogenous shocks Solution of the system This is a linear first-order stochastic difference equation