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Working Paper
Multivariate detrending under common trend restrictions: implications for business cycle research
This paper outlines a methodology to detrend multiple time series under common trend restrictions. The same filters used to construct the estimated trend in univariate exercises are shown to be appropriate in multivariate studies with a single common trend. However, to estimate the common trend in the multivariate case, the filter is applied to a linear combination of series rather than to each series individually. An empirical example and simulation exercises illustrate the implications of common trend detrending for measurement of business cycle properties.
Working Paper
Shifting endpoints in the term structure of interest rates
This paper links the term structure to perceptions of monetary policy. Long-horizon forecasts of short rates needed in empirical term structure models are heavily influenced by the endpoints, or limiting conditional forecasts, of the short rate process. Mean-reversion or unit roots are commonly assumed, but do not provide realistic yield predictions. Failures occur because neither accounts for historical shifts in market perceptions of the policy target for inflation. This paper links endpoint shifts to a learning model where agents must detect shifts in long-term policy goals. With ...
Working Paper
Permanent and transitory policy shocks in an empirical macro model with asymmetric information
Despite a large literature documenting that the efficacy of monetary policy depends on how inflation expectations are anchored, many monetary policy models assume: (1) the inflation target of monetary policy is constant; and, (2) the inflation target is known by all economic agents. This paper proposes an empirical specification with two policy shocks: permanent changes to the inflation target and transitory perturbations of the short-term real rate. The public sector cannot correctly distinguish between these two shocks and, under incomplete learning, private perceptions of the inflation ...
Working Paper
Moving endpoints and the internal consistency of agents' ex ante forecasts
Forecasts by rational agents contain embedded initial and terminal boundary conditions. Standard time series models generate two types of long-run "endpoints"---fixed endpoints and moving average endpoints. Neither can explain the shifting endpoints implied by postwar movements in the cross-section of forward rate forecasts in the term structure or by post-1979 changes in survey estimates of expected inflation. Multiperiod forecasts by a broader class of "moving endpoint" time series models provide substantially improved tracking of the historical term structure and generally support the ...
Journal Article
Longer-term perspectives on the yield curve and monetary policy
In the spring of 2004, there was widespread expectation in financial markets that the Federal Reserve would shortly begin the process of raising its federal funds rate target back toward a more normal level. At the time, there was considerable concern that removing policy accommodation could lead to a sharp rise in long-term interest rates that might roil financial markets or slow the economic recovery. Much of this concern was based on the sizable increases in long-term rates that occurred when the Federal Reserve tightened policy in 1994-95 and 1999-2000. In contrast to the conventional ...
Working Paper
Dynamic specifications in optimizing trend-deviation macro models
As noted in surveys by Goodfriend and King (1997) and Walsh (1998) and exemplified by models analyzed in Taylor (1999), there is encouraging progress in developing optimizing trend-deviation macro models that provide useful insights into the transmission and design of monetary policy. Several controversial features of a minimalist trend-deviation model, with optimizing households, firms, and bond traders, are examined. Dynamic specifications are suggested to improve the data-based realism, while preserving the simplicity, of the minimalist model.
Journal Article
The productivity growth slowdown: diverging trends in the manufacturing and service sectors
Continuing gains in labor productivity are essential to keep real wages and the U.S. standard of living from stagnating. After a period of strong gains in the 1960s, the average growth rate of productivity slowed substantially in the early 1970s. In the following years, productivity continued to grow slowly despite rapid technological advances in such areas as computers and digital communications. Analysts have proposed differing explanations for the productivity slowdown and for the failure of productivity growth to rebound in recent years. Most explanations focus on aggregate factors, such ...
Working Paper
Estimating equilibrium real interest rates in real time
We use a range of simple models and 22 years of real-time data vintages for the U.S. to assess the difficulties of estimating the equilibrium real interest rate in real time. Model specifications differ according to whether the time-varying equilibrium real rate is linked to trend growth, and whether potential output and growth are defined by the CBO's estimates or treated as unobserved variables. Our results reveal a high degree of specification uncertainty, an important one-sided filtering problem, and considerable imprecision due to data uncertainty. Also, the link between trend growth and ...
Journal Article
Predicting real growth and inflation with the yield spread
Analysts often use financial variables to help predict real activity and inflation. One of the most popular of these variables is the spread between yields on long-term and short-term government instruments, also known as the yield spread. Researchers have shown the spread is a good predictor of real activity. For instance, in a recent issue of the Economic Review, Bonser-Neal and Morley found that the spread helps predict real activity over the next year, the next two years, and the next three years.> Kozicki examines the predictive power of the yield spread for real growth and inflation in ...