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Newsletter
Inflation Expectations, the Phillips Curve, and the Fed’s Dual Mandate
This Summer 2021 issue of Page One Economics describes how to think about stable prices, how inflation has evolved in recent years, how the relationship between inflation and employment is changing, and what the Federal Open Market Committee (FOMC) has recently stated about its strategy to meet its price stability goal.
Discussion Paper
The Federal Reserve’s responses to the post-Covid period of high inflation
In the face of the COVID-19 pandemic in March 2020, the Federal Reserve committed to using its full range of tools to support the U.S. economy. Over the next year and a half, with progress on vaccinations and strong policy support, indicators of economic activity and employment strengthened while inflation moved higher. Faced with a tight labor market and elevated inflation, the Federal Open Market Committee (FOMC) began a process of unwinding the very accommodative stance of monetary policy and moving to a restrictive policy stance to address inflation pressures. Here we review the sequence ...
Working Paper
Let's Close the Gap: Revising Teaching Materials to Reflect How the Federal Reserve Implements Monetary Policy
The topic of the Federal Reserve’s (the Fed’s) implementation of monetary policy has a significant presence in economics textbooks as well as standards and guidelines for economics instruction. This presence likely reflects the fact that it is the implementation framework that helps ensure that the Fed’s desired level of its policy interest rate is transmitted to financial markets, which helps it steer the economy toward the Congressional dual mandate of maximum employment and price stability. Over the past decade or so, the Fed has purposefully shifted the way it implements monetary ...
Working Paper
Some simple tests of the globalization and inflation hypothesis
This paper evaluates the hypothesis that globalization has increased the role of international factors and decreased the role of domestic factors in the inflation process in industrial economies. Toward that end, we estimate standard Phillips curve inflation equations for 11 industrial countries and use these estimates to test several predictions of the globalization and inflation hypothesis. Our results provide little support for that hypothesis. First, the estimated effect of foreign output gaps on domestic consumer price inflation is generally insignificant and often of the wrong sign. ...
Discussion Paper
How Dynamic is Bank Liquidity, Including when the COVID-19 Pandemic First Set In?
Banks need sufficient liquidity—cash and other assets that may be easily and immediately converted into cash—to meet their financial obligations, such as when households withdraw deposits or businesses tap credit lines. One key takeaway from the Global Financial Crisis of 2007–09 was that continuity of bank intermediation is particularly important in times of stress to limit pressure on the financial system, and that banks need to consistently maintain sufficient liquidity to achieve that outcome.
Journal Article
Making Technical Adjustments: The Difference Between “Conducting” and “Implementing” Monetary Policy
Technical adjustments to the Fed’s administered rates help to implement existing monetary policy in changing market conditions.
Working Paper
The effect of exchange rate fluctuations on multinationals' returns
This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. nonfinancial multinationals. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases the number of significantly exposed firms in a simple Jorion (1990) regression by 60 percent. Then separating crisis from non-crisis months we find additional evidence of exposure. Although the value of exposure does not change with the size of the exchange rate movement, we find some firms have ...
Working Paper
Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation
The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale ...
Discussion Paper
Implementing Monetary Policy in an "Ample-Reserves" Regime: When in Crisis (Note 3 of 3)
Note 1 and Note 2 in this three-part series described how the Federal Reserve (or Fed) implements monetary policy in normal times, with an ample quantity of reserves in the banking system. In this third and final Note in our series, we take a detour in light of current circumstances and describe how the Fed operates amid a crisis—when facing severely strained economic or financial circumstances, or both.