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Working Paper
The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model
Martinez-Garcia, Enrique; Cole, Stephen J. (2020-05-27)
This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. Hence, anticipation ...
Globalization Institute Working Papers , Paper 375

Working Paper
Finite-Order VAR Representation of Linear Rational Expectations Models: With Some Lessons for Monetary Policy
Martinez-Garcia, Enrique (2016-09-01)
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 ...
Globalization Institute Working Papers , Paper 285

Working Paper
On the sustainability of exchange rate target zones with central parity realignments
Martinez-Garcia, Enrique (2015-06-01)
I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler?s ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.
Globalization Institute Working Papers , Paper 243

COVID-19 Risks Expose Vulnerabilities, Downside Risks to U.S. Outlook
Coulter, Jarod; Martinez-Garcia, Enrique (2021-03-02)
The COVID-19 crisis has adversely affected the U.S. economy, helping account for a projected 3.4 percent contraction in 2020. The Congressional Budget Office (CBO) anticipates a strong 4.6 percent rebound in 2021, making up for those losses.
Dallas Fed Economics

Journal Article
Investment enhances emerging economies' living standards
Martinez-Garcia, Enrique (2015-04)
Investment helps countries at all levels of economic development reap productivity gains from new technologies and improve living standards. Investing to support innovation and a skilled workforce is as crucial for China as it is for the U.S.
Economic Letter , Volume 10 , Issue 5 , Pages 1-4

Working Paper
Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest
Martinez-Garcia, Enrique (2021-02-20)
I investigate the downward drift of U.S. interest rates from 1984:Q1 to 2019:Q4. For this, I bring the workhorse two-country New Keynesian model to data on the U.S. and an aggregate of its major trading partners using Bayesian techniques. I show that the U.S. natural (or equilibrium) interest rate recovered from the model has fallen more gradually than the long-run U.S. real rate, cushioned by productivity shocks. Since inflation expectations became well-anchored in the ‘90s, this implies that the continued interest rate decline is largely explained by the real rate tracking the natural ...
Globalization Institute Working Papers , Paper 403

Discussion Paper
The global slack hypothesis
Wynne, Mark A.; Martinez-Garcia, Enrique (2010-09)
We illustrate the analytical content of the global slack hypothesis in the context of a variant of the widely used New Open-Economy Macro model of Clarida, Gal, and Gertler (2002) under the assumptions of both producer currency pricing and local currency pricing. The model predicts that the Phillips curve for domestic CPI inflation will be flatter under most plausible parameterizations, the more important international trade is to the domestic economy. The model also predicts that foreign output gaps will matter for inflation dynamics, along with the domestic output gap. We also show that the ...
Staff Papers , Issue Sep

Gazing at r-star: Gauging U.S. monetary policy via the natural rate of interest
Martinez-Garcia, Enrique (2023-07-03)
While estimating r-star is fraught with difficulty, the latest evidence suggests U.S. monetary policy likely turned restrictive at the start of 2023, after the Federal Reserve started raising rates in March 2022.
Dallas Fed Economics

Working Paper
Checking the Path Towards Recovery from the COVID-19 Isolation Response
Martinez-Garcia, Enrique; Kydland, Finn E. (2020-05-12)
This paper examines the impact of the behavioral changes and governments' responses to the spread of the COVID-19 pandemic using a unique dataset of daily private forecasters' expectations on a sample of 32 emerging and advanced economies from January 1 till April 13, 2020. We document three important lessons from the data: First, there is evidence of a relation between the stringency of the policy interventions and the health outcomes consistent with slowing down the spread of the pandemic. Second, we find robust evidence that private forecasters have come to anticipate a sizeable ...
Globalization Institute Working Papers , Paper 384

Working Paper
Forecasting local inflation in Open Economies: What Can a NOEM Model Do?
Martinez-Garcia, Enrique; Duncan, Roberto (2022-12-21)
This paper provides both theoretical insight as well as empirical evidence in support of the view that inflation is largely a global phenomenon. First, we show that inflation across countries incorporates a significant common factor captured by global inflation. Second, we show that in theory a role for global inflation in local inflation dynamics emerges over the business cycle even without common shocks, and under flexible exchange rates and complete international asset markets. Third, we identify a strong "error correction mechanism" that brings local inflation rates back in line with ...
Globalization Institute Working Papers , Paper 235

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