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Working Paper
Liquidity Traps and Monetary Policy: Managing a Credit Crunch
Buera, Francisco J.; Nicolini, Juan Pablo (2014-07-18)
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the ...
Working Papers , Paper 714

Working Paper
Helicopter Drops and Liquidity Traps
Amador, Manuel; Bianchi, Javier (2023-04-06)
We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are, at best, irrelevant.
Working Papers , Paper 797

Report
Business cycle fluctuations and the distribution of consumption
De Giorgi, Giacomo; Gambetti, Luca (2015-03-01)
This paper sheds new light on the interactions between business cycles and the consumption distribution. We use Consumer Expenditure Survey data and a factor model to characterize the cyclical dynamics of the consumption distribution. We first establish that our approach is able to closely match business cycle fluctuations of consumption from the National Account. We then study the responses of the consumption distribution to total factor productivity shocks and economic policy uncertainty shocks. Importantly, we find that the responses of the right tail of the consumption distribution, ...
Staff Reports , Paper 716

Working Paper
Credible Forward Guidance
Nakata, Taisuke; Sunakawa, Takeki (2019-05-17)
We analyze credible forward guidance policies in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates by solving a series of optimal sustainable policy problems indexed by the duration of reputational loss. Lower-for-longer policies---while effective in stimulating the economy at the ELB---are potentially time-inconsistent, as the associated overheating of the economy in the aftermath of a crisis is undesirable ex post. However, if reneging on a lower-for-longer promise leads to a loss of reputation and prevents the central bank from effectively using ...
Finance and Economics Discussion Series , Paper 2019-037

Working Paper
Optimal Age-Based Vaccination and Economic Mitigation Policies for the Second Phase of the COVID-19 Pandemic
Heathcote, Jonathan; Krueger, Dirk; Rios-Rull, Jose-Victor; Glover, Andrew (2021-12-17)
In this paper we ask how to best allocate a given time-varying supply of vaccines during the second phase of the Covid-19 pandemic across individuals of different ages. Building on the heterogeneous household model of optimal economic mitigation and redistribution developed by Glover et al. (2021), we contrast the actual vaccine deployment path that prioritized older individuals with one that first vaccinates younger workers. Vaccinating older adults first saves more lives but slows the economic recovery relative to inoculating younger adults first. Vaccines carry large welfare benefits in ...
Research Working Paper , Paper RWP 21-15

Working Paper
Fiscal Expansions in the Era of Low Real Interest Rates
Garga, Vaishali (2020-04-01)
Low natural real interest rates limit the power of monetary policy to revive the economy due to the zero lower bound (ZLB) on the nominal interest rate. Fiscal stabilization via higher government debt is frequently recommended as a policy to raise the natural real interest rate. This paper builds a non-Ricardian framework to study the tradeoffs associated with a debt-financed fiscal expansion and show that even in a low real interest rate environment, higher debt doesn’t necessarily raise the real interest rate. The effect of the expansion is non-monotonic: Increasing debt raises the ...
Working Papers , Paper 20-11

Working Paper
Interest Rate Dynamics, Variable-Rate Loan Contracts, and the Business Cycle
Pintus, Patrick A.; Wen, Yi; Xing, Xiaochuan (2015-09-01)
The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when business-cycle movements are driven, in a significant way, by animal spirit shocks to credit-financed investment demand. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate ...
Working Papers , Paper 2015-32

Working Paper
Recovery of 1933
Jacobson, Margaret M.; Leeper, Eric M.; Preston, Bruce (2023-05-12)
When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this ...
Finance and Economics Discussion Series , Paper 2023-032

Working Paper
Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia
Hills, Timothy S.; Nakata, Taisuke (2014-11-20)
The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the ...
Finance and Economics Discussion Series , Paper 2014-107

Discussion Paper
Do You Know How Your Treasury Trades Are Cleared and Settled?
Mithal, Radhika; Keane, Frank M.; Fleming, Michael J.; Copeland, Adam (2018-09-12)
The Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secondary market trades of U.S. Treasury securities. The paper describes in detail the many ways Treasury trades are cleared and settled? information that may not be readily available to all market participants?and identifies potential risk and resiliency issues. The work is designed to facilitate discussion as to whether current practices have room for improvement. In this post, we summarize the current state of clearing and settlement for secondary market Treasury ...
Liberty Street Economics , Paper 20180912

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