Search Results
Working Paper
Learning and Misperception: Implications for Price-Level Targeting
Monetary policy strategies that target the price level have been advocated as a more effective way to provide economic stimulus in a deep recession when conventional monetary policy is limited by the zero lower bound on nominal interest rates. Yet, the effectiveness of these strategies depends on a central bank's ability to steer agents' expectations about the future path of the policy rate. We develop a flexible method of learning about the central bank's policy rule from observed interest rates that takes into account the limited informational content at the zero lower bound. When agents ...
Working Paper
Employment, Wages and Optimal Monetary Policy
We study optimal monetary policy when the empirical evidence leaves the policymaker uncertain whether the true data-generating process is given by a model with sticky wages or a model with search and matching frictions in the labor market. Unless the policymaker is almost certain about the search and matching model being the correct data-generating process, the policymaker chooses to stabilize wage inflation at the expense of price inflation, a policy resembling the policy that is optimal in the sticky wage model, regardless of the true model. This finding reflects the greater sensitivity of ...
Working Paper
On Targeting Frameworks and Optimal Monetary Policy
Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the ability to commit to future policies. Even if the policymaker can commit under an inflation targeting strategy, the discretionary speed limit policy performs better for most empirically plausible model parameterizations from a normative perspective.
Working Paper
Macroeconomic Policy Games
Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and ...
Working Paper
Commodity Prices and Labour Market Dynamics in Small Open Economies
We investigate the connection between commodity price shocks and unemployment in advanced resource-rich small open economies from an empirical and theoretical perspective. Shocks to commodity prices are shown to influence labour market conditions primarily through the real exchange rate. The empirical impact of commodity price shocks is obtained from estimating a panel vector autoregression; a positive price shock is found to expand the components of GDP, to cause the real exchange rate to appreciate, and to improve labour market conditions. For every one percent increase in commodity prices, ...
Working Paper
Social Distancing and Supply Disruptions in a Pandemic
Drastic public health measures such as social distancing or lockdowns can reduce the loss of human life by keeping the number of infected individuals from exceeding the capacity of the health care system but are often criticized because of the social and the economic cost they entail. We question this view by combining an epidemiological model, calibrated to capture the spread of the COVID-19 virus, with a multisector model, designed to capture key characteristics of the U.S. Input Output Tables. Our two-sector model features a core sector that produces intermediate inputs not easily replaced ...
Working Paper
Alternative Strategies: How Do They Work? How Might They Help?
Several structural developments in the U.S. economy—including lower neutral interest rates and a flatter Phillips curve—have challenged the ability of the current monetary policy framework to deliver on the Federal Open Market Committee’s (FOMC) dual-mandate goals. This paper explores whether makeup strategies, in which policymakers seek to stabilize average inflation around the inflation target over some horizon, could strengthen the FOMC’s ability to fulfill its dual mandate. The quantitative analysis discussed here suggests that credible makeup strategies may provide some moderate ...
Discussion Paper
Forecasting During the COVID-19 Pandemic: A Structural Analysis of Downside Risk
The global collapse in economic activity triggered by individual and policy-mandated responses to the spread of COVID-19 is unprecedented both in scale and origin. At the time of writing, U.S. GDP is expected by professional forecasters to contract a staggering 6 percent over the course of 2020 driven by its 32 percent collapse in the second quarter (measured at an annual rate).
Discussion Paper
The Transmission of Global Risk
Turmoil in the banking sector in the U.S. and Europe in early 2023 brought jitters to financial markets and increased concerns about a global risk-off event. Risk-off episodes—periods of increased global risk aversion—are characterized by sharp increases in credit spreads, high volatility in equity markets, and appreciation of reserve currencies
Working Paper
Optimal Monetary and Fiscal Policy under Limited Foresight
We investigate Barro's random walk hypothesis according to which distortionary labor taxes should follow a random walk for any stochastic process of government expenditures, see Barro (1979). When agents experience cognitive discounting as in Gabaix (2020), they perceive government debt as wealth, and the random walk result breaks down except for knife-edge combinations of limited rationality by policymakers and the private sector. For these specific parameter values, the result can reemerge, but minor deviations from these knife-edge combinations lead to stationary equilibrium dynamics, ...