Research

In Preparation
Jonathan Benchimol, Sophia Kazinnik, and Yossi Saadon. In Preparation. “Communication and transparency through central bank texts”.
Jonathan Benchimol and Caroline Bozou. In Preparation. “Risk aversion, credit and banking”.
Submitted
Jonathan Benchimol and Makram El-Shagi. Submitted. “Forecast performance in times of terrorism.” Economic Modelling.Abstract
Governments, central banks, and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, a factor that should be considered by decision-makers. We focus on terrorism as a mostly endogenously driven form of political uncertainty and assess the forecasting performance of market-based and professional inflation and exchange rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, the performance of both market-based and expert forecasts is significantly worse during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange rate forecasts.
Paper
Jonathan Benchimol and Lahcen Bounader. Submitted. “Optimal monetary policy under bounded rationality”.Abstract
We build a behavioral New Keynesian model that emphasizes different forms of myopia for households and firms. By examining the optimal monetary policy within this model, we find four main results. First, in a framework where myopia distorts agents' inflation expectations, the optimal monetary policy entails implementing inflation targeting. Second, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality in a behavioral world. Third, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy. Fourth, bounded rationality may be associated with welfare gains.
Paper
Jonathan Benchimol and Sergey Ivashchenko. Submitted. “Switching volatility in a nonlinear open economy”.Abstract
Uncertainty about a regime's economy can change drastically around a crisis. An imported crisis, such as the global financial crisis (GFC) in the Euro area, shines a spotlight on the effect of foreign shocks. By estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the Euro area and the US including Markov switching volatility shocks, we show that these shocks are significant during the GFC compared to more normal periods. We describe how US shocks from both the real economy and financial markets impacted the Euro area economy, and how bond reallocation occurred between short- and long-term maturities during the GFC. The estimated nonlinearities when domestic and foreign financial markets impact the economy should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation to provide additional interpretations to policymakers.
Paper Appendix
Forthcoming
Jonathan Benchimol and Irfan Qureshi. Forthcoming. “Time-varying money demand and real balance effects.” Economic Modelling. [doi]Abstract
This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that household's money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the household's preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest elasticity of money demand of approximately one-third during the 1970s due to high trend inflation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to financial innovation. These developments led to a reduction in the welfare cost of inflation that subsequently explains the rise in monetary neutrality observed in the data.
Paper
2019
Jonathan Benchimol and André Fourçans. 2019. “Central bank losses and monetary policy rules: a DSGE investigation.” International Review of Economics & Finance. [doi]Abstract
Central banks' monetary policy rules being consistent with policy objectives are a fundamental of applied monetary economics. We seek to determine, first, which of the central bank's rules are most in line with the historical data for the US economy and, second, what policy rule would work best to assist the central bank in reaching its objectives via several loss function measures. We use Bayesian estimations to evaluate twelve monetary policy rules from 1955 to 2017 and over three different sub-periods. We find that when considering the central bank's loss functions, the estimates often indicate the superiority of NGDP level targeting rules, though Taylor-type rules lead to nearly identical implications. However, the results suggest that various central bank empirical rules, be they NGDP or Taylor type, are more appropriate to achieve the central bank's objectives for each type of period (stable, crisis, recovery).
Paper Online Appendix
2017
Jonathan Benchimol and André Fourçans. 2017. “Money and monetary policy in the Eurozone: an empirical analysis during crises.” Macroeconomic Dynamics. [doi]Abstract
This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.
Paper Online Appendix
2016
Jonathan Benchimol. 2016. “Money and monetary policy in Israel during the last decade.” Journal of Policy Modeling. [doi]Abstract
This study examines how money and monetary policy have influenced output and inflation during the past decade in Israel by comparing two New Keynesian DSGE models. One is a baseline separable model (Gali, 2008) and the other assumes non-separable household preferences between consumption and money (Benchimol & Fourçans, 2012). We test both models by using rolling window Bayesian estimations over the last decade (2001–2013). The results of the presented dynamic analysis show that the sensitivity of output with respect to money shocks increased during the Dot-com, Intifada, and Subprime crises. The role of monetary policy increased during these crises, especially with regard to inflation, even though the effectiveness of conventional monetary policy decreased during the Subprime crisis. In addition, the non-separable model including money provides lower forecast errors than the baseline separable model without money, while the influence of money on output fluctuations can be seen as a good predictive indicator of bank and debt risks. By impacting and monitoring households’ money holdings, policy makers could improve their forecasts and crisis management through models considering monetary aggregates.
Paper Online Appendix
2015
Jonathan Benchimol. 2015. “Money in the production function: a new Keynesian DSGE perspective.” Southern Economic Journal. [doi]Abstract
This article checks whether money is an omitted variable in the production process by proposing a microfounded New Keynesian Dynamic Stochastic General Equilibrium model. In this framework, real money balances enter the production function, and money demanded by households is differentiated from that demanded by firms. Using a Bayesian analysis, our model weakens the hypothesis that money is a factor of production. However, the demand of money by firms appears to have a significant impact on the economy, even if this demand has a low weight in the production process.
Paper
2014
Jonathan Benchimol. 2014. “Risk aversion in the Eurozone.” Research in Economics. [doi]Abstract
We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods from 1971 through 2011, each lasting for 20 years, to follow over time the dynamics of several parameters such as the risk aversion parameter; the Taylor rule coefficients; and the role of the risk aversion shock in output, inflation, interest rate, and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it was between 1971 and 2006, at least in the short run.
Paper
2012
Jonathan Benchimol and André Fourçans. 2012. “Money and risk in a DSGE framework: a Bayesian application to the Eurozone.” Journal of Macroeconomics. [doi]Abstract
We present and test a model of the Eurozone, with a special emphasis on the role of risk aversion and money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. Money is also introduced in the Taylor rule. By using Bayesian estimation techniques, we shed light on the determinants of output, inflation, money, interest rate, flexible-price output, and flexible-price real money balance dynamics. The role of money is investigated further. Its impact on output depends on the degree of risk aversion. Money plays a minor role in the estimated model. Yet, a higher level of risk aversion would imply that money had significant quantitative effects on business cycle fluctuations.
Paper