Search Results
Journal Article
Assessing Recent Stock Market Valuation with Macro Data
History suggests that elevated values of the cyclically adjusted price-earnings (CAPE) ratio may indicate an overvalued stock market. A valuation model that uses a small set of economic variables can help account for movements in the CAPE ratio over the past six decades. One of these variables is a macroeconomic uncertainty index. Comparing the model’s prediction for the second and third quarters of 2020 to the 2008–2009 period suggests that investors have reacted to macroeconomic uncertainty very differently during the COVID-19 outbreak than they did during the financial crisis.
Working Paper
Learning about a shift in trend output: implications for monetary policy and inflation
This paper develops a small forward-looking macroeconomic model where the Federal Reserve estimates the level of potential output in real time by running a regression on past output data. The Fed's perceived output gap is used as an input to the monetary policy rule while the true output gap influences aggregate demand and inflation. I investigate the consequences of two postulated shifts in the growth rate of U.S. potential output: the first occurs in the early-1970s and the second in the mid-1990s. Initially, Fed policymakers interpret these shifts to be cyclical shocks but their regression ...
Working Paper
Replicating and Projecting the Path of COVID-19 with a Model-Implied Reproduction Number
We fit a simple epidemiology model to daily data on the number of currently-infected cases of COVID-19 in China, Italy, the United States, and Brazil. These four countries can be viewed as representing different stages, from late to early, of a COVID-19 epidemic cycle. We solve for a model-implied effective reproduction number Rt each day so that the model closely replicates the daily number of currently infected cases in each country. Using the model-implied time series of Rt, we construct a smoothed version of the in-sample trajectory which is used to project the future evolution of Rt and ...
Working Paper
Optimal fiscal policy when public capital is productive: a business cycle perspective
A presentation of a dynamic general-equilibrium model with productive public capital to help account for differences in the business cycle characteristics of public- versus private- sector expenditures in postwar U.S. data.
Conference Paper
Learning about a shift in trend output: implications for monetary policy and inflation
This paper develops a small forward-looking macroeconomic model where the Federal Reserve estimates the level of potential output in real time by running a regression on past output data. The Fed's perceived output gap is used as an input to the monetary policy rule while the true output gap influences aggregate demand and inflation. I investigate the consequences of two postulated shifts in the growth rate of U.S. potential output; the first occurs in the early-1970s and the second in the mid-1990s. Initially, Fed policymakers interpret these shifts to be cyclical shocks but their regression ...
Working Paper
Speculative growth and overreaction to technology shocks
This paper develops a stochastic endogenous growth model that exhibits ?excess volatility? of equity prices because speculative agents overreact to observed technology shocks. When making forecasts about the future, speculative agents behave like rational agents with very low risk aversion. The speculative forecast rule alters the dynamics of the model in a way that tends to confirm the stronger technology response. For moderate levels of risk aversion, the forecast errors observed by the speculative agent are close to white noise, making it difficult for the agent to detect a ...
Journal Article
R-star, Uncertainty, and Monetary Policy
Investors? demand for safe assets tends to increase when there?s more uncertainty, as in recessions. Consistent with this idea, short-term movements in the natural rate of interest, or r-star, are negatively correlated with an index of macroeconomic uncertainty. This relationship may be relevant for assessing monetary policy. An estimated policy rule that incorporates both r-star and the uncertainty index can largely reproduce the path of the federal funds rate since 1988, except during periods when policy was constrained by the zero lower bound.
Working Paper
Computable general-equilibrium models and monetary policy advice
An argument that variations of extant general-equilibrium monetary models can generate real-time economic forecasts comparable in accuracy to those contained in the Federal Reserve Board's "Greenbook" briefing documents.
Journal Article
Return of the Original Phillips Curve
The link between changes in U.S. inflation and the output gap has weakened in recent decades. Over the same time, a positive link between the level of inflation and the output gap has emerged, reminiscent of the original 1958 version of the Phillips curve. This development is important because it indicates that structural changes in the economy have not eliminated the inflationary pressure of gap variables. Improved anchoring of people’s expectations for inflation, which makes the expected inflation term in the Phillips curve more stable, can account for both observations.
Journal Article
Projecting the Long-Run Natural Rate of Interest
The ?natural? rate of interest?the real rate consistent with full use of economic resources and steady inflation near the Fed?s target level?is an important benchmark for monetary policy. Current estimates suggest that this rate is near zero, but it is expected to rise gradually in the years ahead as real GDP returns to its long-run potential. If the historical statistical relationship between the growth rate of potential GDP and the natural rate holds true in the future, then a 2% long-run growth rate would imply a long-run natural rate of around 1%.