Search Results
Working Paper
Higher-order Moment Inequality Restrictions for SVARs
We introduce a method that exploits some non-Gaussian features of structural shocks to identify structural vector autoregression (SVAR) models. More specifically, we propose combining inequality restrictions on the higher-order moments of the structural shocks of interest with other set-identifying constraints, typically sign restrictions. We illustrate how, in both large and small sample settings, higher-order moment restrictions considerably narrow the identification of monetary policy shocks compared with what is obtained with minimal sign restrictions typically used in the SVAR ...
Working Paper
Strengthening the FOMC’s Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies
We analyze the framework for monetary policy in view of the effective lower bound (ELB). We find that the ELB is likely to bind in most future recessions and propose some ways that theoretical models imply that the framework could be strengthened. We also discuss ways that commitment strategies, which are not part of the framework, may improve economic outcomes. These policies can suffer from a time-inconsistency problem, which we analyze.
Journal Article
The Macroeconomic Effects of the 2018 Bipartisan Budget Act
The 2018 Bipartisan Budget Act raised government spending caps by $300 billion for fiscal years 2018 and 2019. While spending does not increase immediately, private sector investment and consumption may respond ahead of an anticipated fiscal stimulus. This Economic Perspectives article assesses the strength of this mechanism based on the private sector?s expectations.
Newsletter
Some inflation scenarios for the American Rescue Plan Act of 2021
The American Rescue Plan Act (ARP) signed into law on March 11, 2021, authorized approximately $1.9 trillion in federal government spending. ARP is widely expected to boost economic growth over the next two to three years—and significantly so early on. The upswing in growth is likely to increase resource pressures and therefore consumer price inflation as well. The potential for this channel to raise inflation substantially has attracted the attention of economic commentators, including Olivier Blanchard and Lawrence Summers. But the magnitudes and persistence of the possible increases in ...
Newsletter
The Effects of the “Great Resignation” on Labor Market Slack and Inflation
The fraction of Americans switching their jobs has been increasing at a fast pace in the past 18 months, reaching its highest level on record. According to the U.S. Department of Labor, more than 4.5 million people voluntarily left their jobs in November 2021—the largest figure in the past two decades. This period has been dubbed the Great Resignation. At the same time, wages and salaries have accelerated considerably and by the end of 2021, inflation had hit its highest level since 1982.
Newsletter
How Tight is U.S. Monetary Policy
In this Chicago Fed Letter, we use a quantitative macroeconomic model to tackle the question of whether the response of the Federal Reserve (the Fed) to recent high inflation is consistent with its historical behavior. This is an important question because systematic deviations from past behavior could lead the private sector to revise its expectations about how the Fed will respond to inflation going forward, which, according to macroeconomic theory, could affect its ability to stabilize inflation in the future.
Working Paper
On-the-Job Search and Inflation Under the Microscope
We develop a model where heterogeneous agents choose whether to engage in on-the-job search (OJS) to improve labor income. The model accounts for untargeted microdata patterns: fiscal incentives affect job-to-job mobility and wage growth of stayers—but not leavers—across the income distribution, pointing to OJS as a key driver of labor costs. Calibrated to micro and macro moments, the model shows that OJS cost shocks significantly affect real activity and inflation. The permanent decline in OJS costs—driven by ICT and AI-based tools—offers a novel explanation for the weakening of the ...
Working Paper
One Fed, Many Voices: Coordinated Communication vs. Transparent Debate
We analyze 481 speeches by FOMC members since 2007, excluding official press conferences. Combining high-frequency financial data with text analysis, we identify monetary policy surprises and measure each speech’s similarity to the Chair’s press conference preceding it. On average, monetary surprises around these speeches have no significant effect on inflation expectations or stock prices. Yet, speeches closely aligned with the Chair’s press conference amplify policy transmission, while less coordinated remarks dilute earlier effects on yields, inflation expectations, and equities. A ...
Working Paper
Signaling effects of monetary policy
We develop a DSGE model in which the policy rate signals the central bank's view about macroeconomic developments to incompletely informed price setters. The model is estimated with likelihood methods on a U.S. data set including the Survey of Professional Forecasters as a measure of price setters' expectations. The signaling effects of monetary policy are found to be empirically important and dampen the effects of monetary disturbances on inflation. While the signaling effects enhance the Federal Reserve's ability to stabilize the economy in the face of demand shocks, they play a small role ...
Working Paper
The Dire Effects of the Lack of Monetary and Fiscal Coordination
What happens if the government?s willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue ...