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Journal Article
The Highs and Lows of Productivity Growth
Productivity growth shows evidence of switching between long periods of high and low average growth. Estimates suggest that the United States has been in the low-growth regime since 2004. Assuming this low growth continues, productivity growth in the year 2025 would be 0.6%. By dropping this assumption and allowing for a switch to consistent higher growth, an alternative estimate forecasts that the distribution of possible productivity growth across quarters could average about 1.1% in 2025.
Working Paper
Asset Purchases in a Monetary Union with Default and Liquidity Risks
Using a two-country monetary-union framework with financial frictions, we study sovereign default and liquidity risks and quantify the efficacy of asset purchases. Default risk increases with government indebtedness and shifts in the fiscal limit perceived by investors. Liquidity risks increase when the default probability affects credit market tightness. The framework indicates that shifts in fiscal limits, more than rising government debt, played a crucial role for Italy around 2012. While both default and liquidity risks can dampen economic and financial conditions, the model suggests that ...
Journal Article
Monetary Policy Stance Is Tighter than Federal Funds Rate
The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target. A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022.
Journal Article
Evaluating Monetary Policy with Inflation Bands and Horizons
Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.
Working Paper
Perturbation methods for Markov-switching DSGE models
This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of Markov-switching DSGE models. We introduce an important and practical idea of partitioning the Markov-switching parameter space so that a steady state is well defined. With this definition, we show that the problem of finding an approximation of any order can be reduced to solving a system of quadratic equations. We propose using the theory of Grobner bases in searching all the solutions to the quadratic system. This approach allows us to obtain all the approximations and ...
Working Paper
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The ...
Journal Article
The Changing Disparity in Prices Across States
Differences in prices for consumer goods and services across states have been increasing since the early 2010s. Those differences accelerated during the pandemic and the subsequent inflation surge. Higher-price states saw faster inflation from 2019 to 2022 compared with lower-price states, leading price levels to diverge further across regions. Data show that state-level inflation was driven by both goods and services, which tended to move together rather than independently in most regions.
Journal Article
Have We Entered an Era of High Productivity Growth?
Labor productivity gains over the past three years helped the U.S. economy expand steadily, even with near-zero employment growth. Combined with substantially increased business investment in artificial intelligence technology, these conditions have raised the question of whether the economy is entering a high-productivity growth period. Two well-known productivity measures do not yet provide strong evidence of this shift. However, recent patterns resemble the mixed signals during the early stages of the 1990s productivity surge before a sustained high-growth period materialized, giving ...
Working Paper
The Past and Future of U.S. Structural Change: Compositional Accounting and Forecasting
We explore the evolving significance of different production sectors within the U.S. economy since World War II and provide methods for estimating and forecasting these shifts. Using a compositional accounting approach, we find that the well-documented transition from goods to services is primarily driven by two compositional changes: 1) the rise of Intellectual Property Products (IPP) as an input producer, replacing Durable Goods almost one-for-one in terms of input shares in virtually all sectors; and 2) a shift in consumer spending from Nondurable Goods to Services. A structural model ...
Journal Article
Why Is the Fed’s Balance Sheet Still So Big?
The Federal Reserve?s balance sheet is significantly larger today than it was before the financial crisis of 2008?2009. Rising demand for currency due to greater economic activity is partly responsible for this increase. The balance sheet will also need to remain large because the Federal Reserve now implements monetary policy in a regime of ample reserves, using a different set of tools than in the past to achieve its interest rate target.