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Working Paper
A Flexible Finite-Horizon Identification of Technology Shocks
Recent empirical studies using in finite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming from their sensitivity to changes in model specification and the general poor performance of long-run restrictions in Monte Carlo experiments. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its in finite ...
Working Paper
Monetary Policy Spillovers, Capital Controls and Exchange Rate Flexibility, and the Financial Channel of Exchange Rates
We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging market economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the ...
Working Paper
What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?
We use economic theory to rank the impact of structural shocks across sectors. This ranking helps us to identify the origins of U.S. business cycles. To do this, we introduce a Hierarchical Vector Auto-Regressive model, encompassing aggregate and sectoral variables. We find that shocks whose impact originate in the "demand" side (monetary, household, and government consumption) account for 43 percent more of the variance of U.S. GDP growth at business cycle frequencies than identified shocks originating in the "supply" side (technology and energy). Furthermore, corporate financial shocks, ...
Report
Congestion and cascades in payment systems
We develop a parsimonious model of the interbank payment system to study congestion and the role of liquidity markets in alleviating congestion. The model incorporates an endogenous instruction arrival process, scale-free topology of payments between banks, fixed total liquidity that limits banks' capacity to process arriving instructions, and a global market that distributes liquidity. We find that at low liquidity, the system becomes congested and payment settlement loses correlation with payment instruction arrival, becoming coupled across the network. The onset of congestion is evidently ...
Working Paper
Estimating Impulse Response Functions When the Shock Series Is Observed
We compare the finite sample performance of a variety of consistent approaches to estimating Impulse Response Functions (IRFs) in a linear setup when the shock of interest is observed. Although there is no uniformly superior approach, iterated approaches turn out to perform well in terms of root mean-squared error (RMSE) in diverse environments and sample sizes. For smaller sample sizes, parsimonious specifications are preferred over full specifications with all ?relevant? variables.
Journal Article
Tracking U.S. GDP in Real Time
Measuring the current state of the U.S. economy in real time is an important but challenging task for monetary policymakers. The most comprehensive measure of the state of the economy?real gross domestic product?is available at a relatively low frequency (quarterly) and with a significant delay (one month). To obtain more timely assessments of the state of the economy, the Federal Reserve Bank of Kansas City has developed a GDP tracking model that combines new econometric methods with two conventional approaches to estimating GDP. {{p}} Taeyoung Doh and Jaeheung Bae review the Kansas City Fed ...
Working Paper
Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks
Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary ...
Working Paper
Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints
We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces ...
Working Paper
Can We Take the “Stress” Out of Stress Testing? Applications of Generalized Structural Equation Modeling to Consumer Finance
Financial firms, and banks in particular, rely heavily on complex suites of interrelated statistical models in their risk management and business reporting infrastructures. Statistical model infrastructures are often developed using a piecemeal approach to model building, in which different components are developed and validated separately. This type of modeling framework has significant limitations at each stage of the model management life cycle, from development and documentation to validation, production, and redevelopment. We propose an empirical framework, spurred by recent developments ...
Working Paper
Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation
Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy coordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, ...