Balint Tatar

Abstract: This paper investigates the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank (ECB). It focuses on versions of the Taylor (1993) and Orphanides and Wieland (OW) (2013) rules. Rules that respond to recent outcomes of HICP Core or domestic inflation data called for raising interest rates in 2021 and well ahead of the rate increases implemented by the ECB. Thus, such simple outcome-based policy rules deserve more attention in the ECB’s monetary policy strategy. Interestingly, the rules support the recent shift of the ECB to policy easing. Yet, they add a note of caution by suggesting that policy rates should not decline as fast as apparently anticipated by traded derivative-based interest rate forecasts.

Abstract: In this paper we adapt the Hamiltonian Monte Carlo (HMC) algorithm to Dynamic Stochastic General Equilibrium (DSGE) models, a method currently applied in various fields owing to its superior sampling and diagnostic properties. We implement it into a freely available state-of-the-art, high-performance software (Stan). We estimate a small-scale textbook New Keynesian model and the Smets-Wouters model using US data. We find that in particular cases the HMC algorithm is faster by over an order of magnitude compared to the standard sampling method. Our results and sampling diagnostics confirm the parameter estimates available in the existing literature. In addition, we find bimodality in the Smets-Wouters model even if we estimate it by using the original tight priors. Finally, we combine the HMC framework with the Sequential Monte Carlo (SMC) algorithm to create a powerful tool which enables us to estimate DSGE models with ill-behaved posterior densities.

Abstract: This paper examines the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. We develop a medium-scale three-region DSGE model and show that the impact of a cut in employers’ social security contributions rate does not vary significantly under different exchange rate regimes. We find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability. Finally, we assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers’ social security contributions rates have statistically significant real effects – a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.