Search Results
Working Paper
The magnitude and cyclical behavior of financial market frictions
We quantify the cross-sectional and time-series behavior of the wedge between the cost of external and internal finance by estimating the structural parameters of a canonical debt-contracting model with informational frictions. For this purpose, we construct a new dataset that includes balance sheet information, measures of expected default risk, and credit spreads on publicly traded debt for about 900 U.S. firms over the period 1997Q1 to 2003Q3. Using nonlinear least squares, we obtain precise time-specific estimates of the bankruptcy cost parameter and consistently reject the null ...
Journal Article
The macroeconomic effects of inflation targeting
Conference Paper
No-arbitrage Taylor rules - comments
Journal Article
Evaluating International Economic Policy with the Federal Reserve's Global Model
FRB/Global is a large-scale macroeconomic model developed and maintained by the Board's staff. This article provides a historical perspective on the development of the model, gives an overview of its structure, and highlights its dynamic properties with three simulation experiments: a reduction in U.S. government purchases; a depreciation of the U.S. dollar; and an increase in the price of oil exported by OPEC. The article illustrates other uses of FRB/Global by examining the spillover effects of fiscal and monetary policy under alternative European monetary policy regimes.
Working Paper
Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden
We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behavior of daily bond yield data in the United Kingdom and Sweden--both inflation targeters--to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy ...
Working Paper
Optimal monetary policy with staggered wage and price contracts
We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot replicate the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff between stabilizing the output gap, price inflation, and wage inflation. The Pareto optimum is attainable only if ...
Working Paper
Recent U.S. macroeconomic stability: good policies, good practices or good luck?
The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the "good-luck" hypothesis as the leading explanation for the decline in aggregate output volatility, ...
Working Paper
Optimal monetary policy with durable and non-durable goods
The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. While the social welfare function involves ...
Working Paper
Data uncertainty and the role of money as an information variable for monetary policy
This paper demonstrates that money can play an important role as an information variable and may result in major improvements in current output estimates. However, the specific nature of this role depends on the magnitude of the output measurement error relative to the money demand shock. In particular, we find noticeable but small improvements in output estimates due to the inclusion of money growth in the information set. Money plays a quantitatively more important role with regard to output estimation if we allow for a contribution of monetary analysis in reducing uncertainty due to money ...
Working Paper
What determines public support for affirmative action?
We present a model of public higher education finance in which demand for educational services can exceed supply because of indivisibilities in educational investment. In such situations, a screening mechanism--which may be imperfect because of direct or indirect discrimination--is required for allocation. We show how changes in the education premium affect political support for affirmative action policies. When the education premium is relatively low, the matching efficiency gains provided by affirmative action policies are relatively high compared to the opportunity cost of not acquiring ...