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Working Paper
Searching for Hysteresis
Journal Article
Estimating a search and matching model of the aggregate labor market
The search and matching model of the labor market has become the workhorse for analyzing unemployment dynamics and the business cycle transmission mechanism. However, many quantitative studies of the search and matching framework argue that it is unable to replicate key labor market facts. These studies typically rely on a wide range of calibrated parameter values for which independent information is difficult to obtain. In this article, I specify and estimate a simple version of the search and matching framework using Bayesian methods. I show that the model has extremely weak internal ...
Working Paper
Modeling Labor Markets in Macroeconomics: Search and Matching
We present and discuss the simple search and matching model of the labor market against the background of developments in modern macroeconomics. We derive a simple representation of the model in a general equilibrium context and how the model can be used to analyze various policy issues in labor markets and monetary policy.
Briefing
How Likely Is a Return to the Zero Lower Bound?
The likelihood of returning to near-zero interest rates is relevant to policymakers in considering the path of future interest rates. At the zero lower bound, the Fed can no longer lower rates and thus can respond to a contraction only through alternative policy measures, such as quantitative easing. Recent research at the Richmond Fed has used repeated simulations of the U.S. economy to estimate the probability of such an occurrence over the next ten years. The estimated probability of returning to the zero lower bound one or more times during this period is approximately one chance in four.
Briefing
Is the output gap a faulty gauge for monetary policy?
Policymakers look to the output gap as a measure of how the economy is performing. However, different methods of computing the output gap can lead to vastly different results, rendering it a potentially poor guide.
Working Paper
Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate
Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of ...
Working Paper
Assessing U.S. Aggregate Fluctuations Across Time and Frequencies
We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks ...
Working Paper
The Lucas critique and the stability of empirical models
Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods have important implications for exchange rate behavior, even though fluctuations in the relative price of nontraded goods account for a relatively small fraction of real exchange rate movements. In our quantitative study ...
Journal Article
Beveridge Curve Shifts and Time-Varying Parameter VARs
We specify a simple search and matching model of the aggregate labor market allowing for productivity-driven changes in match efficiency. This mechanism leads to shifts in the Beveridge curve that are broadly consistent with the pattern observed in the United States. We simulate data from the fully nonlinear solution of the model and estimate a time-varying parameter vector-autoregressions (TVP-VAR) on the unemployment and vacancies series to assess whether the shifts in the underlying theoretical model are being picked up by the nonlinear time series model. The results suggest that the ...
Working Paper
Deep habits in the New Keynesian Phillips curve
We derive and estimate a New Keynesian Phillips curve (NKPC) in a model where consumers are assumed to have deep habits. Habits are deep in the sense that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner as it introduces expected and contemporaneous consumption growth as well as the expected marginal value of future demand as additional driving forces for inflation dynamics. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable ...