Essays in monetary policy and comprehensive income accounting: Inferring time-varying central bank preferences and the value of ideas

This dissertation consists of three self-contained essays. The first two address time-varying central bank preferences and the third considers the contribution of non-rivalrous ideas to welfare and income. Chapter 1 derives the implications of a time-varying inflation target for long interest rate sensitivity and volatility, contrasting the cases when the target is communicated and when it is not. In the latter case, bond markets infer the value of the target from noisy signals about inflation. This heightens the sensitivity of long-run inflation expectations and the nominal component of long bond yields to transitory shocks. As a result, coefficients from regressions of long rates on monetary policy and inflation surprises are substantially higher than with a communicated target. The model can replicate the degree of observed long rate sensitivity in the United States and also shows that asymmetric information about the target adds volatility to bond returns.; Chapter 2 traces the evolution of central bank preferences for inflation and output stability in the United States over the last 50 years. With flexible inflation targeting, time-varying preferences for output stability are revealed through inflation persistence. An autoregressive model of inflation with time-varying persistence parameters is estimated and the results indicate that the inflation target has been stable and close to 2.5 percent but that the preference for output stability has moved considerably. The estimated decline in inflation persistence in the early 1980s and throughout the 1990s corresponds to a stronger relative preference for inflation stability during the Volcker and Greenspan terms.; Chapter 3 employs a stylised R&D-based growth model to value the contribution of idea-creation to welfare and income. Motivated by the Hamiltonian of the optimisation problem, net product is broadened to include investment in knowledge and researchers. This raises per capita income by a markup factor over final output and a range of calibrations suggest income could be 10 to 100 percent higher than currently measured. Net product growth is a weighted average of the growth rates of all sectors in the economy and differs from final output growth, particularly when ideas are an important input to production and the spillover of knowledge-creation to future research productivity is high. Unlike final output growth, the policy maker is able to influence the growth of real net product with taxes on wages in the research sector or on capital accumulation.