Publications by Author: Huw Pill

In the context of a small monetary DSGE model of the business cycle, this paper investigates the interrelationship between structural economic reform (modeled as the introduction of greater competition in the goods market) and monetary stability (captured by the dynamic stability of the resulting macroeconomic system). After making minor but plausible adjustments to the standard New Keynesian macroeconomic framework, the paper demonstrates that a conventional monetary policy framework, defined by adherence to the so–called Taylor principle, may – contrary to the received wisdom – fail to maintain macroeconomic and monetary stability. The likelihood of such failure increases as structural economic reform is introduced for two reasons: first, greater goods market competition narrows equilibrium mark–ups and thus the leverage monetary policy exerts over cyclical inflation developments; and, second, private sector expectations are subject to non–fundamental shocks that arise from the uncertainty surrounding the effectiveness of structural reform.

In this paper, the conceptual and empirical bases for the role of monetary aggregates in monetary policy making are reviewed. It is argued that money can act as a useful information variable in a world in which a number of indicators are imperfectly observed. In this context, the paper discusses the role of a reference value (or benchmark) for money growth in episodes of heightened financial uncertainty. A reference value for money growth can also act as an anchor for expectations and policy decisions to prevent divergent dynamics, such as the spiraling of the economy into a liquidity trap, which can occur under simple interest rate rules for policy conduct. The paper concludes that using information included in monetary aggregates in monetary policy decisions can provide an important safeguard against major policy mistakes in the presence of model uncertainty.

Explanations of the boom/bust economic cycle characteristic of emerging markets have emphasized the role of institutional weaknesses in the financial sector in creating macroeconomic instability. Testing this proposition using aggregate data is complicated by the difficulty of identifying banks' credit supply decisions independently of credit demand by the domestic non–financial private sector. In this paper, a panel of Argentine bank balance sheet data is used to investigate the cross–sectional variation in bank lending decisions in response to macroeconomic shocks. The emergence of systematic cross–sectional patterns suggests bank characteristics – and thus bank behavior – play an important role in transmitting macroeconomic shocks to emerging market economies.

When taking monetary policy decisions, central banks face considerable uncertainty about the transmission mechanism of monetary policy to the price level. In particular, the role played by monetary developments in the transmission mechanism is not well understood. Two paradigms exist: one assigns monetary developments an entirely passive role; the other gives money an active role, beyond that of an indicator variable. Taking such uncertainty as a starting point for analysis, this paper evaluates a number of monetary policy rules for short–term interest rate decisions in the face of paradigm uncertainty. It describes what constitutes an efficient rule in this context and discusses procedures leading to the adoption of such rules.