Learning-by-Doing and Monetary Policy Last Draft: August 2022 Abstract: Most of the modern business cycle models do not allow an interaction between monetary policy and economy's productivity. This paper departs from that baseline and develops a simple New Keynesian model augmented with an assumption of endogenous productivity. In the model economy's productivity is formed through the means of leaning-by-doing: higher labor effort leads to endogenous learning and accumulation of human capital over time increasing future labor productivity and vice versa. Consistent with recent empirical findings, it is shown that in such environment monetary policy shocks (as well as other aggregate shocks) can be much more persistent. Spillover effect arising from learning-by-doing makes the central bank willing to commit to much tighter policy stance under optimal policy regime conditional on negative inflationary shock. Simple policy rules that prioritize inflation objective over output gap stability goal can help to approximate optimal policy to some extent. Under certain conditions, policy rule that targets economy's productivity may be even more welfare-improving.
Where Would We Be if the Fed Followed Its Own Rules? Last Draft: December 2022 Abstract: This article shows what level of the federal funds rate would prevail in current economic conditions if the Fed exactly followed the Taylor Rule. My analysis suggests that at the time of the first post-pandemic liftoff in March 2022 the implied federal funds rate was at least 4.14% – more that 3.9p.p. above its factual level at the time. Moreover, the liftoff itself was supposed to begin in March 2021 rather than one year later. To access the scale of excess policy accommodation I calculate an average spread of the federal funds rate to the Taylor Rule benchmark. Looking at this statistic in retrospect I document that the current level of implied excess policy accommodation is pretty much comparable to the one observed in early 1970s – right before the Great Inflation period. Even after a series of substantial rate hikes in 2022, the stance monetary policy in the US remains too loose compared to the Taylor Rule's recommendations.
Work in Progress
- Supply Chain Disruptions, Inflation and Monetary Policy