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Discussion Paper
Credibility of Optimal Forward Guidance at the Interest Rate Lower Bound
Market participants and other analysts generally expect that the federal funds rate will rise from its effective lower bound (ELB) later this year. However, the ELB could again become a binding constraint on monetary policy in the future.
Discussion Paper
Raising the Inflation Target: Lessons from Japan
In January 2013, the Bank of Japan increased its inflation target from 1 percent to 2 percent in an effort to end chronic deflation that had lasted for more than a decade. In this note, the author reviews this Japanese experience and highlights possible lessons for other central banks that may be interested in examining the possibility of raising their inflation target at some point in the future.
Working Paper
Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy
We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. There is no straightforward recipe for enhancing welfare in this economy. Raising the inflation target or appointing an inflation-conservative central banker mitigates the inflation shortfall away from the lower bound but exacerbates deflationary pressures at the lower bound. Using government spending as an additional policy instrument worsens allocations at and away from the lower bound. However, appointing a policymaker who is ...
Working Paper
Conservatism and Liquidity Traps
Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB ...
Working Paper
The Risky Steady State and the Interest Rate Lower Bound
Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 45 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more ...
Working Paper
Equilibrium Yield Curves and the Interest Rate Lower Bound
We study the term structure of default-free interest rates in a sticky-price model with an occasionally binding effective lower bound (ELB) constraint on interest rates and recursive preferences. The ELB constraint induces state-dependency in the dynamics of term premiums by affecting macroeconomic uncertainty and interest-rate sensitivity to economic activities. In a model calibrated to match key features of the aggregate economy and term structure dynamics in the U.S. above and at the ELB, we find that the ELB constraint typically lowers the absolute size of term premiums at the ELB and ...
Working Paper
The potential role of subordinated debt programs in enhancing market discipline in banking
Previous studies have found that subordinated debt (sub-debt) markets do differentiate between banks with different risk profiles. This finding satisfies a necessary condition for regulatory proposals which would mandate increased reliance on sub-debt in the bank capital structure to discipline banks? risk taking. Such proposals, however, have not been implemented, partially because there are still concerns about the quality of the signal generated in current debt markets. We argue that previous studies evaluating the potential usefulness of sub-debt proposals have evaluated spreads in an ...
Working Paper
Financial Stability and Optimal Interest-Rate Policy
We study optimal interest-rate policy in a New Keynesian model in which the economy can experience financial crises and the probability of a crisis depends on credit conditions. The optimal adjustment to interest rates in response to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to ...
Journal Article
The trend growth rate of employment : past, present, and future
Over the course of the recovery from the 2001 recession, many forecasters have revised downward their expectations for job growth in the United States. The often disappointing pace of employment growth has been attributed to various forces, such as the high health-care costs faced by employers, structural changes causing some industries to decline, outsourcing of jobs from the United States to other countries, and strong productivity growth. Many of these explanations imply the sluggish pace of job gains to be the result of weakness in aggregate demand and labor demand. However, some ...
Working Paper
Uncertainty at the zero lower bound
This paper examines how the presence of uncertainty alters allocations and prices when the nominal interest rate is constrained by the zero lower bound. I conduct the analysis using a standard New Keynesian model in which the nominal interest rate is determined according to a truncated Taylor rule. I find that an increase in the variance of shocks to the discount factor process reduces consumption, inflation, and output by a substantially larger amount when the zero lower bound is binding than when it is not. Due to the zero lower bound constraint, policy functions for the real interest rates ...