Search Results
Working Paper
The Financial Origins of Non-Fundamental Risk
We formalize the idea that the financial sector can be a source of non-fundamental risk. Households' desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate nonfundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the ...
Report
Slow recoveries and unemployment traps: monetary policy in a time of hysteresis
We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers? skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point where the economy recovers slowly at best?at worst, it falls into a permanent unemployment trap. Since monetary policy is powerless to escape such traps ex post, it must avoid them ex ante. The model quantitatively accounts for the slow U.S. recovery following the Great Recession, and suggests that lack ...
Working Paper
Estimates of Cost-Price Passthrough from Business Survey Data
We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs. Survey respondents expected reduced growth in costs and prices of about 5 percent on average over the next year. Backward-looking, forward-looking, and hypothetical scenarios reveal average cost-price passthrough of ...
Discussion Paper
Escaping Unemployment Traps
Economic activity has remained subdued following the Great Recession. One interpretation of the listless recovery is that recessions inflict permanent damage on an economy’s productive capacity. For example, extended periods of high unemployment can lead to skill losses among workers, reducing human capital and lowering future output. This notion that temporary recessions have long-lasting consequences is often termed hysteresis. Another explanation for sluggish growth is the influential secular stagnation hypothesis, which attributes slow growth to long-term changes in the economy’s ...
Discussion Paper
On the Distributional Effects of Inflation and Inflation Stabilization
This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply ...
Working Paper
Estimates of Cost-Price Passthrough from Business Survey Data
We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs. Survey respondents expected reduced growth in costs and prices of about 5 percent on average over the next year. Backward-looking, forward-looking, and hypothetical scenarios reveal average cost-price passthrough of ...
Discussion Paper
The Effect of Monetary and Fiscal Policy on Inequality
How does accounting for households’ heterogeneity—and in particular inequality in income and wealth—change our approach to macroeconomics? What are the effects of monetary and fiscal policy on inequality, and what did we learn in this regard from the COVID-19 pandemic? What are the implications of inequality for the transmission of monetary policy, and its ability to stabilize the economy? These are some of the questions that were debated at a recent symposium on “Heterogeneity in Macroeconomics: Implications for Policy” organized by the new Applied Macroeconomics and Econometrics ...
Report
Estimating HANK for Central Banks
We provide a toolkit for efficient online estimation of heterogeneous agent (HA) New Keynesian (NK) models based on Sequential Monte Carlo methods. We use this toolkit to compare the out-of-sample forecasting accuracy of a prominent HANK model, Bayer et al. (2022), to that of the representative agent (RA) NK model of Smets and Wouters (2007, SW). We find that HANK’s accuracy for real activity variables is notably inferior to that of SW. The results for consumption in particular are disappointing since the main difference between RANK and HANK is the replacement of the RA Euler equation with ...
Discussion Paper
How Do Firms Adjust Prices in a High Inflation Environment?
How do firms set prices? What factors do they consider, and to what extent are cost increases passed through to prices? While these are important questions in general, they become even more salient during periods of high inflation. In this blog post, we highlight preliminary results from ongoing research on firms’ price-setting behavior, a joint project between researchers at the Federal Reserve Banks of Atlanta, Cleveland, and New York. We use a combination of open-ended interviews and a quantitative survey in our analysis. Firms reported that the strength of demand was the most important ...
Report
Understanding HANK: insights from a PRANK
We show analytically that whether incomplete markets resolve New Keynesian ?paradoxes? depends primarily on the cyclicality of income risk, rather than marginal propensity to consume (MPC) heterogeneity. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these ?puzzles.? Procyclical risk permits determinacy under a peg; countercyclical risk generates indeterminacy even under the Taylor principle. MPC heterogeneity leaves determinacy and paradoxes qualitatively unaffected, but can change ...