Search Results
Journal Article
Permanent and Transitory Effects of the 2008–09 Recession
Separating U.S. economic output into permanent and transitory components can help explain the effects of recessions and expansions. GDP growth shifted to a lower trend rate in 2000, indicating a slowdown long before the 2008–09 recession. GDP was substantially above trend before that recession; it then declined significantly and did not recover to its trend rate until 2017. The recession resulted in permanent losses to GDP. Without those permanent effects, GDP at the end of the latest expansion would have been about $380 billion or $1,460 per person higher.
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
Aggregate Implications of Changing Sectoral Trends
We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and ...
Working Paper
Communicating Monetary Policy Rules
Despite the ubiquity of inflation targeting, central banks communicate their frameworks in a variety of ways. No central bank explicitly expresses their conduct via a policy rule, which contrasts with models of policy. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, inflation ...
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 ...
Journal Article
Anatomy of the Post-Pandemic Monetary Tightening Cycle
The Federal Reserve tightened monetary policy rapidly between 2021 and 2023. In addition, a weekly proxy federal funds rate shows that markets perceived the policy stance as tightening significantly even in weeks without explicit policy changes. The proxy rate uses financial market data to infer the broad stance of monetary policy as determined by funds rate changes, forward guidance about projected future rates, and balance sheet changes. Results show that the weekly proxy rate can capture changes that reflect both policy tools and market reactions to changing economic news.
Working Paper
Optimal Monetary Policy Regime Switches
An economy that switches between high and low growth regimes creates incentives for the monetary authority to change its rule. As lower growth tends to produce lower real interest rates, the monetary authority has an incentive to increase the inflation target and increase the degree of inertia in setting rates in an attempt to keep the nominal rate away from the zero lower bound. An optimizing monetary authority therefore responds to permanently lower growth by slightly increasing both the inflation target and inertia; focusing solely on the inflation target ignores a key margin of ...
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.
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.