讲解 EC3115 Monetary Economics Summer 2021辅导 数据结构语言

EC3115 Monetary Economics

Summer 2021

Section A

Answer all EIGHT questions from this section.

Indicate whether the following statements are true or false, or uncertain and give a short explanation. Points are only given for a well reasoned answer.

1. When looking at business cycles, the component of real GDP we are most interested in is the trend.

2. The Lucas critique implies that it is difficult to exploit the empirically observed Phillips curve.

3. The Baumol-Tobin inventory model can explain the precautionary demand for money.

4. Patinkin argued that the classical theory omitted real balance effects.

5. Governments are inherently inflation averse.

6. If the business cycle component of consumption is found to be countercyclical, this implies higher volatility of consumption relative to investment.

7. The terms of money neutrality and superneutrality can be used interchangeably.

8. Parameter uncertainty refers to the uncertainty about policymakers’ preferences.

Section B

Answer THREE out of FIVE questions from this section.

9. On February 1, 2021, the Bank of England provided the following information on the yield curve

where Rt are the spot rates, i.e. the yield to maturity of a bond with T years to maturity and πt e is the expected inflation for period t.

(a) (6 points) Calculate the implied forward curve, containing the future expected one period interest rates.

(b) (4 points) Using the information above and the data provided, calculate the implied future real interest rates for year 3, 4 and 5.

(c) (6 points) How do your answers in part (a) and (b) change if you assume a risk premium of 0.05% per annum, i.e. k1 = 0%, k2 = 0.05%, . . . , k5 = 0.2%?

(d) (4 points) One of the stylized facts of yield curves is that yield curves tend to be steep and upwards sloping when current short term rates are low. Based on your answers above, does this stylized fact hold true at the moment? Explain why or why not.

10. Many central banks rely on simple monetary rules to guide them in the setting of mone-tary policy. One example of a monetary policy rule is the Taylor Rule, the reduced form. of which is written as:

Rt = α + βy˜t + γπt

where Rt is the policy rate, α, β, and γ are coefficients, ˜yt is the output gap and πt is inflation.

(a) (6 points) Discuss what monetary policy rules are and why they are attractive to a central bank.

(b) (4 points) What restrictions are normally placed on the coefficients β and γ of the Taylor rule outlined above? How can you interpret these coefficients?

(c) (6 points) Discuss whether the coefficients β and γ should be smaller or larger in the presence of uncertainty.

Friedman advocated a different monetary rule: the rule of constant money growth. He argued that monetary authorities should not try to stabilize output.

(d) (4 points) Explain the reasoning behind Friedman’s argument against trying to stabilize output.

11. Suppose that the economy is characterised by the following aggregate supply (π) and aggregate demand (y) equations.

πt = yt + απt−1

yt = −βit + Et

where y is the output gap, π is the inflation and i is the short term nominal rates the monetary authority controls. α and β are structural parameters of the model. The output gap equation is subject to a shock Et . This shock is distributed i.i.d. normally and E ~ (0, σE2 ) and its statistical properties are known to the monetary authority. Suppose that the monetary authority has a loss function given by

L = (πt − π*) 2

Note that the monetary authority cares only about inflation stabilisation around a target rate π* = 0. Having this structure in mind answer the following questions.

(a) (7 points) Suppose the economy is subject to only additive shocks (E). How should the monetary authority set the interest rate? What does the concept of certainty equivalence mean?

(b) (8 points) Ever since the work by Brainard (1967), it is accepted that structural relationships between key macroeconomic variables governed by the structural pa-rameters may change over time. Now, modify the model such that the β parameter is subject to uncertainty such that

yt = −βtit

How do your results change? Interpret carefully the optimal interest rate policy response. What does the coefficient of variation represent?

(c) (5 points) Since the Global Financial Crisis in 2008 the nominal interest rates are around zero percent limiting the ability of monetary authority to use short term rates to stimulate the economy or deal with inflation. What can the policymaker do in such circumstances if they wish to stimulate the economy or target inflation?

12. Consider the following scenario. Suppose that the monetary authority looks at the past data and estimates the following Lucas aggregate supply curve relationship.

yt = y* + α(πt − Et−1πt)

where yt is the observed real output level, y ∗ is the constant natural rate of output, πt is the actual inflation rate and Et−1πt is the expected inflation based on surveys con-ducted. Monetary authority finds that the estimated parameter α is a positive number suggesting that an increase in inflation above the expected level leads to an increase in real output that is above the natural rate of output. Based on this information the monetary authority decides to increase the inflation rate by injecting liquidity into the economy in order to achieve a higher level of output.

(a) (10 points) Do you think this is a sensible policy decision? What are the perils of such a policy conduct? Discuss by using algebra and graphs.

(b) (10 points) How can the inflation bias can be avoided? Discuss analytically.

13. The concept of money has evolved significantly over time. From barter in early societies, to the evolution of commodity money, and currently, the use of fiat money.

(a) (4 points) Explain how commodity money is a natural evolution from barter. Dis-cuss in the context of the Wicksell problem.

For a significant part of economic history, countries have used commodity moneys, in particular metallic standards. The most notable of these was the gold standard, prevalent in the 19th and 20th century, under which the supply of money was backed by gold. To this day, there is a small but vocal group of people who advocate for a return to the gold standard.

(b) (6 points) Explain how prices were determined under the gold standard. Discuss what the implications were for price stability under the gold standard.

(c) (4 points) Discuss and explain one advantage and one disadvantage of fiat money over the gold standard.

In February 2021 it was announced that Tesla bought $1.5 billion worth of bitcoin. It’s founder—and at times the world’s richest man—Elon Musk has described bitcoin as the ‘currency of the future’.

(d) (6 points) Outline and define the three main characteristics of a good money. Explain to what extent bitcoin meets these criteria and discuss whether you believe bitcoin is likely to become an important form. of money.