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Working Paper
Co-movement in sticky price models with durable goods
In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by ...
Working Paper
Asset prices, nominal rigidities, and monetary policy
Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.
Journal Article
Monetary policy rules and stability: inflation targeting versus price-level targeting
Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But because banks base their actions on forecasts of future inflation, following the rule can lead to inflation-rate instability in some cases. A price-level target offers the same benefits as an inflation target but, because actions are based on past inflation, it avoids this vulnerability.
Journal Article
Enterprise liability: a prescription for health care reform?
A look at how the cost and quality of medical services in the United States would be affected by enterprise liability, a malpractice reform proposal that would 1) transfer liability in malpractice cases from the doctor to the patient's health care plan and 2) institute no-fault malpractice insurance.
Working Paper
The efficiency and welfare effects of tax reform: are fewer tax brackets better than more?
Using the well-known dynamic fiscal policy framework pioneered by Auerbach and Kotlikoff, we examine the efficiency and welfare implications of shifting from a linear marginal tax rate structure to a discrete rate structure characterized by two regions of flat tax rates of 15 and 28 percent. For a wide range of parameter values, we find that there is no sequence of lump-sum transfers that the (model) government can feasibly implement to make the shift from the linear to the discrete structure Pareto-improving. We conclude that the worldwide trend toward replacing rate structures having many ...
Working Paper
Indexed debt contracts and the financial accelerator
This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
Journal Article
Gaps versus growth rates in the Taylor Rule
There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.
Working Paper
Computable general-equilibrium models and monetary policy advice
An argument that variations of extant general-equilibrium monetary models can generate real-time economic forecasts comparable in accuracy to those contained in the Federal Reserve Board's "Greenbook" briefing documents.
Journal Article
Perils of price deflations: an analysis of the Great Depression
If a central bank adopted a zero inflation target, it would, in practice, occasionally deviate up and down from that rate, and the economy would experience episodes of mild inflation and deflation. Is deflation-a decrease in the level of prices-a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect of massive price declines on output during the Great Depression. The authors find that while deflation can cause output to decline, mild episodes of ...
Journal Article
Milton Friedman, teacher, 1912-2006
Nobel laureate Milton Friedman, who died on November 16, 2006, made monumental contributions to economics and changed the course of modern central banking. Many of his proposals for the conduct of monetary policy were controversial at the time he made them but are now widely accepted. This Commentary reviews some of them.