I understand that inflation can cut the value of debt for countries and companies, because higher prices mean more revenue for the same output therefore additional money to pay of debt. However, does this apply to personal debt?
The reason is that central banks react to variables, such as inflation and the output gap, which are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term, and hence, an asymptotic bias.
In principle, Instrumental Variables IV estimation can solve this endogeneity problem.
In practice, IV estimation poses challenges as the validity of potential instruments also depends on other economic relationships. We argue in favor of OLS estimation of monetary policy rules.
To that end, we show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors accounted for by monetary policy shocks. Using Monte Carlo simulation, we then show that this relationship also holds in a quantitative model of the U.
As monetary policy shocks explain only a small fraction of the variance of regressors typically included in monetary policy rules, the endogeneity bias is small.
Using simulations, we show that, for realistic sample sizes, the OLS estimator of monetary policy parameters outperforms IV estimators.Executive summary. Capital Economics has been commissioned by Woodford Investment Management to examine the United Kingdom’s relationship with Europe and the impact .
CEPR organises a range of events; some oriented at the researcher community, others at the policy commmunity, private sector and civil society. The yield spread between long-term and short-term Treasury securities is known to be a good predictor of economic activity, particularly of looming recessions.
Applied Economics and Finance Vol. 2, No. 3; levels have led to inflation.
How does monetary policy influence inflation and employment? In the short run, monetary policy influences inflation and the economy-wide demand for goods and services--and, therefore, the demand for the employees who produce those goods and services--primarily through its influence on the financial conditions facing households and firms.
A look at the effects of foreign aid from rich countries on developing countries. This article looks at the low quantity and quality of aid from donors.