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Newsletter
Some inflation scenarios for the American Rescue Plan Act of 2021
The American Rescue Plan Act (ARP) signed into law on March 11, 2021, authorized approximately $1.9 trillion in federal government spending. ARP is widely expected to boost economic growth over the next two to three years—and significantly so early on. The upswing in growth is likely to increase resource pressures and therefore consumer price inflation as well. The potential for this channel to raise inflation substantially has attracted the attention of economic commentators, including Olivier Blanchard and Lawrence Summers. But the magnitudes and persistence of the possible increases in ...
Working Paper
Macroeconomic implications of agglomeration
The authors construct a dynamic general equilibrium model of cities and use it to estimate the effect of local agglomeration on per capita consumption growth. Agglomeration affects growth through the density of economic activity: higher production per unit of land raises local productivity. Firms take productivity as given; produce using a technology that has constant returns in developed land, capital, and labor; and accumulate land and capital. If land prices are rising, as they are empirically, firms economize on land. This behavior increases density and contributes to growth. They use a ...
Working Paper
Technology shocks matter
This paper uses the neoclassical growth model to identify the effects of technological change on the US business cycle. In the model there are two sources of technological change: neutral, which effects the production of all goods homogeneously, and investment-specific. Investment-specific shocks are the unique source of the secular trend in the real price of investment goods, while shocks to both kinds of technology are the only factors which affect labor productivity in the long run. Consistent with previous empirical work which considers only neutral shocks, the results suggest these ...
Journal Article
The Macroeconomic Effects of the 2018 Bipartisan Budget Act
The 2018 Bipartisan Budget Act raised government spending caps by $300 billion for fiscal years 2018 and 2019. While spending does not increase immediately, private sector investment and consumption may respond ahead of an anticipated fiscal stimulus. This Economic Perspectives article assesses the strength of this mechanism based on the private sector?s expectations.
Working Paper
(S, s) inventory policies in general equilibrium
We study the aggregate implications of (S,s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the model's retail sector face idiosyncratic demand risk, and (S,s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two ways: variation in the decision to order and variation in the rate of sale through the pricing decisions of retailers. We find that both mechanisms must operate to reconcile observations that orders are more volatile than, and inventory investment is ...
Newsletter
How Tight is U.S. Monetary Policy
In this Chicago Fed Letter, we use a quantitative macroeconomic model to tackle the question of whether the response of the Federal Reserve (the Fed) to recent high inflation is consistent with its historical behavior. This is an important question because systematic deviations from past behavior could lead the private sector to revise its expectations about how the Fed will respond to inflation going forward, which, according to macroeconomic theory, could affect its ability to stabilize inflation in the future.
Newsletter
Changes in the Risk-Management Environment for Monetary Policy
In response to the massive challenges presented by the global financial crisis, in late 2007 the Federal Open Market Committee (FOMC) began a series of large reductions in its traditional policy tool, the overnight interest rate in the federal funds market. By December 2008 the Committee had lowered the target to its effective lower bound (ELB) of 0 to 25 basis points.1 Later, in an attempt to provide additional monetary stimulus, the FOMC implemented nontraditional policy tools, such as large-scale asset purchases and forward guidance about how long the fed funds rate would stay at very low ...
Working Paper
Macroeconomic effects of Federal Reserve forward guidance
A large output gap accompanied by stable inflation close to its target calls for further monetary accommodation, but the zero lower bound on interest rates has robbed the Federal Open Market Committee (FOMC) of the usual tool for its provision. We examine how public statements of FOMC intentions?forward guidance?can substitute for lower rates at the zero bound. We distinguish between Odyssean forward guidance, which publicly commits the FOMC to a future action, and Delphic forward guidance, which merely forecasts macroeconomic performance and likely monetary policy actions. Others have shown ...
Working Paper
The Chicago Fed DSGE model
The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This article describes its specification and estimation, its dynamic characteristics and how it is used to forecast the US economy. In many respects the model resembles other medium scale New Keynesian frameworks, but there are several features which distinguish it: the monetary policy rule includes forward guidance, productivity is driven by neutral and investment specific technical change, multiple price indices identify inflation and there ...