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Discussion Paper
A DSGE Perspective on Safety, Liquidity, and Low Interest Rates
Tambalotti, Andrea; Giannoni, Marc; Gupta, Abhi; Giannone, Domenico; Li, Pearl; Del Negro, Marco (2018-02-07)
The preceding two posts in this series documented that interest rates on safe and liquid assets, such as U.S. Treasury securities, have declined significantly in the past twenty years. Of course, short-term interest rates in the United States are under the control of the Federal Reserve, at least in nominal terms. So it is legitimate to ask, To what extent is this decline driven by the Federal Reserve’s interest rate policy? This post addresses this question by coupling the results presented in the previous post with those obtained from an estimated dynamic stochastic general equilibrium ...
Liberty Street Economics , Paper 20180207

Discussion Paper
How Do Survey- and Market-Based Expectations of the Policy Rate Differ?
Morse, Ari; Fiorica, Joseph; Brodsky, Bonni; Rodrigues, Anthony P.; LeSueur, Eric; Del Negro, Marco (2016-04-07)
Over the past year, market pricing on interest rate derivatives linked to the federal funds rate has suggested a significantly lower expected path of the policy rate than responses to the New York Fed’s Survey of Primary Dealers (SPD) and Survey of Market Participants (SMP). However, this gap narrowed considerably from December 2015 to January 2016, before widening slightly at longer horizons in March. This post argues that the narrowing between December and January was mostly the result of survey respondents placing greater weight on lower rate outcomes, while the subsequent widening ...
Liberty Street Economics , Paper 20160407

Report
Dynamic prediction pools: an investigation of financial frictions and forecasting performance
Del Negro, Marco; Schorfheide, Frank; Hasegawa, Raiden B. (2014-10-01)
We provide a novel methodology for estimating time-varying weights in linear prediction pools, which we call dynamic pools, and use it to investigate the relative forecasting performance of dynamic stochastic general equilibrium (DSGE) models, with and without financial frictions, for output growth and inflation in the period 1992 to 2011. We find strong evidence of time variation in the pool?s weights, reflecting the fact that the DSGE model with financial frictions produces superior forecasts in periods of financial distress but doesn?t perform as well in tranquil periods. The dynamic ...
Staff Reports , Paper 695

Discussion Paper
What’s Up with the Phillips Curve?
Chen, William; Del Negro, Marco; Lenza, Michele; Primiceri, Giorgio E.; Tambalotti, Andrea (2020-09-18)
U.S. inflation used to rise during economic booms, as businesses charged higher prices to cope with increases in wages and other costs. When the economy cooled and joblessness rose, inflation declined. This pattern changed around 1990. Since then, U.S. inflation has been remarkably stable, even though economic activity and unemployment have continued to fluctuate. For example, during the Great Recession unemployment reached 10 percent, but inflation barely dipped below 1 percent. More recently, even with unemployment as low as 3.5 percent, inflation remained stuck under 2 percent. What ...
Liberty Street Economics , Paper 20200918a

Report
Inflation in the Great Recession and New Keynesian models
Giannoni, Marc; Del Negro, Marco; Schorfheide, Frank (2013)
It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent great recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a modest and protracted decline in inflation following the rise in financial stress in the fourth quarter of 2008. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary ...
Staff Reports , Paper 618

Working Paper
Global Trends in Interest Rates
Tambalotti, Andrea; Giannoni, Marc; Del Negro, Marco; Giannone, Domenico (2018-10-16)
The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.
Working Papers , Paper 1812

Discussion Paper
Forecasting with the FRBNY DSGE Model
Tambalotti, Andrea; Eusepi, Stefano; Sbordone, Argia M.; Giannoni, Marc; De Paoli, Bianca; Del Negro, Marco (2014-09-22)
The Federal Reserve Bank of New York (FRBNY) has built a DSGE model as part of its efforts to forecast the U.S. economy. On Liberty Street Economics, we are publishing a weeklong series to provide some background on the model and its use for policy analysis and forecasting, as well as its forecasting performance. In this post, we briefly discuss what DSGE models are, explain their usefulness as a forecasting tool, and preview the forthcoming pieces in this series.
Liberty Street Economics , Paper 20140922

Journal Article
Take your model bowling: forecasting with general equilibrium models
Del Negro, Marco; Schorfheide, Frank (2003-10)
During the past two decades, dynamic stochastic general equilibrium (DSGE) models have taken center stage in academic macroeconomics. Nonetheless, these models are still rarely used in policy-making and forecasting. ; This article describes the workings of the DSGE-VAR, a procedure that combines DSGE models and vector autoregressions (VARs). The procedure uses DSGE models as priors to restrict the VAR?s parameters. Since the VAR?s parameters are imprecisely estimated unless a very long time series of data is available, using DSGE priors can improve the VAR?s forecasting performance. Moreover, ...
Economic Review , Volume 88 , Issue Q4 , Pages 35-50

Discussion Paper
Measuring the Financial Stability Real Interest Rate, r**
Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Nourbash, Ethan; Queraltó, Albert (2023-05-24)
Comparing our financial stability real interest rate, r** (“r-double-star”) with the prevailing real interest rate gives a measure of how vulnerable the economy is to financial instability. In this post, we first explain how r** can be measured, and then discuss its evolution over the last fifty years and how to interpret the recent banking turmoil within this framework.
Liberty Street Economics , Paper 20230524

Discussion Paper
A History of SOMA Income
Bukhari, Meryam; Del Negro, Marco; Cambron, Alyssa; Remache, Julie (2013-08-13)
Historically, the Federal Reserve has held mostly interest-bearing securities on the asset side of its balance sheet and, up until 2008, mostly currency on its liability side, on which it pays no interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007 prompted a number of changes to the balance sheet. First, the asset side of the balance sheet ...
Liberty Street Economics , Paper 20130813

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