Search Results
Working Paper
Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies
This paper estimates the natural rate of interest for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. Our empirical analysis establishes the following four main findings: First, we show that the open economy framework provides a better fit of the data than its closed economy counterpart for the six countries we investigate. Second, we also show that, in all six countries, a Taylor (1993)-type monetary policy rule that tracks the Wicksellian short-term natural rate fits the data better ...
Working Paper
Inflation as a global phenomenon - some implications for policy analysis and forecasting
We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by exploiting the spatial pattern of international propagation of inflation. We model these spatial linkages using global inflation and either domestic slack or oil price fluctuations, motivated by a novel interpretation of the forecasting implications of the workhorse openeconomy New Keynesian model (Martnez-Garca and Wynne (2010), Kabukcuoglu and Martnez-Garca (2014)). We find that incorporating spatial interactions yields significantly more accurate forecasts of local inflation in 14 advanced ...
Working Paper
Finite-Order VAR Representation of Linear Rational Expectations Models: With Some Lessons for Monetary Policy
This paper considers the characterization via finite-order VARs of the solution of a large class of linear rational expectations (LRE) models. I propose a unified approach that uses a companion Sylvester equation to check the existence and uniqueness of a solution to the canonical (first-order) LRE model in finite-order VAR form and a quadratic matrix equation to characterize it decoupling the backward- and forward-looking aspects of the model. I also investigate the fundamentalness of the shocks recovered. Solving LRE models by this procedure is straightforward to implement, general in its ...
Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble
There is growing cause for concern that U.S. house prices are again becoming unhinged from fundamentals.
Journal Article
Monetary Policy and Economic Performance Since the Financial Crisis
We review the macroeconomic performance during the Global Financial Crisis and subsequent economic expansion, as well as the challenges in the pursuit of the Federal Reserve's dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.
Fed’s New Inflation Targeting Policy Seeks to Maintain Well-Anchored Expectations
The Fed’s evolving understanding of the economy and its reassessment of the natural rate of interest have led to arguably the most significant policy change since 2012.
Working Paper
The global component of local inflation: revisiting the empirical content of the global slack hypothesis with Bayesian methods
The global slack hypothesis is central to the discussion of the trade-offs that monetary policy faces in an increasingly more integrated world. The workhorse New Open Economy Macro (NOEM) model of Martnez-Garca and Wynne (2010), which fleshes out this hypothesis, shows how expected future local inflation and global slack affect current local inflation. In this paper, I propose the use of the orthogonalization method of Aoki (1981) and Fukuda (1993) on the workhorse NOEM model to further decompose local inflation into a global component and an inflation differential component. I find that the ...
Working Paper
New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment
We use a broad-range set of inflation models and pseudo out-of-sample forecasts to assess their predictive ability among 14 emerging market economies (EMEs) at different horizons (1 to 12 quarters ahead) with quarterly data over the period 1980Q1-2016Q4. We find, in general, that a simple arithmetic average of the current and three previous observations (the RW-AO model) consistently outperforms its standard competitors - based on the root mean squared prediction error (RMSPE) and on the accuracy in predicting the direction of change. These include conventional models based on domestic ...
Working Paper
Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound
We propose a TVP-VAR with stochastic volatility for the unemployment rate, core inflation and the federal funds rate augmented with survey-based interest rate expectations and uncertainty and a FAVAR with a wider set of observable variables and alternative monetary policy measures in order to explore U.S. monetary policy, accounting for the zero lower bound. We find that a rise in monetary policy uncertainty increases unemployment and lowers core inflation; the effects on unemployment in particular are robust (a gradual 0.4 percentage point increase), lasting more than two years after the ...
Working Paper
Monetary Policy and Economic Performance since the Financial Crisis
We review macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.