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Working Paper
Evaluating Macroeconomic Outcomes Under Asymmetries: Expectations Matter
Asymmetries play an important role in many macroeconomic models. We show that assumptions on household and firm expectations play a key role in determining the effects of these asymmetries on macroeconomic outcomes. If households and firms have perfect foresight and hence do not account for the possibility of future shocks, then the implied longer-run averages and distributions for unemployment and inflation can differ significantly from their rational expectations counterparts. We first derive this result analytically under either an asymmetric monetary policy rule or a nonlinear Phillips ...
Working Paper
How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?
The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the ...
Journal Article
Estimating the monetary policy rule perceived by forecasters
Brent Bundick examines whether the FOMC?s implicit monetary policy rule, as perceived by professional forecasters, changed when the federal funds rate reached its effective lower bound.
Journal Article
The Persistent Effects of the Temporary Tightening in Financial Conditions
Market-based measures of uncertainty, a common proxy for broader financial conditions, rose sharply in the fourth quarter of 2018 but have retreated to more normal levels over the last few months. While the recent increase in uncertainty was brief, the temporary tightening in financial conditions will likely have longer-lasting effects on economic activity and prices.
Working Paper
Forward Guidance, Monetary Policy Uncertainty, and the Term Premium
We examine the macroeconomic and term-premia implications of monetary policy uncertainty shocks. Using Eurodollar options, we employ the VIX methodology to measure implied volatility about future short-term interest rates at various horizons. We identify monetary policy uncertainty shocks using the unexpected changes in this term structure of implied volatility around monetary policy announcements. {{p}} Two principal components succinctly characterize these changes around policy announcements, which have the interpretation as shocks to the level and slope of the term structure of implied ...
Journal Article
Despite High Inflation, Longer-Term Inflation Expectations Remain Well Anchored
The Federal Reserve’s long-run 2 percent inflation target is intended to prevent periods of high inflation from becoming embedded in longer-term inflation expectations. However, inflation has remained above the Fed’s target for over three years, increasing the risk that longer-term inflation expectations could become unanchored. Building on our previous research, we study recent market reactions to inflation news and find that longer-term inflation expectations appear to remain well anchored.
Working Paper
Uncertainty shocks in a model of effective demand
This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no ...
Journal Article
Are longer-term inflation expectations stable?
Bundick and Hakkio use survey data to evaluate the stability of forecasters' long-term inflation expectations.
Working Paper
Do federal funds futures need adjustment for excess returns? a state-dependent approach
This paper utilizes a Markov-switching framework to model excess returns in federal funds futures contracts. This framework identifies a high-volatility state where excess returns are large, positive, and volatile and a low-volatility state where excess returns have a lower volatility and are small in absolute value. Federal funds futures rates require adjustment for excess returns only in the high-volatility state. Intermeeting rate cuts of the federal funds rate target always correspond with the high-volatility regime and can explain much of the variation in excess returns. This paper also ...
Working Paper
Labor Market Dynamics, Monetary Policy Tradeoffs, and a Shortfalls Approach to Pursuing Maximum Employment
This paper reviews recent academic studies to assess the implications of adopting a shortfalls, rather than a deviations, approach to pursuing maximum employment. Model-based simulations from these studies suggest three main findings. First, shortfalls rules generate inflationary pressure relative to deviations rules, which offsets downward pressure on inflation stemming from the presence of the effective lower bound. Second, since monetary policy leans against these inflationary pressures, a shortfalls rule implies a limited effect on average outcomes in the labor market. Finally, ...