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Working Paper
Demographics and Real Interest Rates Across Countries and Over Time
We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments ...
Journal Article
Fed communication and the zero lower bound
After the onset of the global financial crisis, the Federal Reserve had to rely on other tools?including communication?to work around the constraints of being unable to lower the federal funds rate below zero. One way to assess how effective these communications were is by estimating how interest rates on bonds with different maturities reacted to Fed communications before and after the zero-bound period. A measure based on news reports of Fed communications suggests that this tool gave the Fed some ability to affect long-term yields through its communications.
Journal Article
Why Is U.S. Inflation Higher than in Other Countries?
Inflation rates in the United States and other developed economies have closely tracked each other historically. Problems with global supply chains and changes in spending patterns due to the COVID-19 pandemic have pushed up inflation worldwide. However, since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries. Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021.
Journal Article
Why Is Inflation Low Globally?
A hot economy eventually boosts inflation. Such is the simple wisdom of the Phillips curve. Yet inflation across developed countries has been remarkably weak since the 2008 global financial crisis, even though unemployment rates are near historical lows. What is behind this recent disconnect between inflation and unemployment? Contrasting the experiences of developed and developing economies before and after the financial crisis shows that broader factors than monetary policy are at play. Inflation has declined globally, and this trend preceded the financial crisis.
Working Paper
Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models
We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence ? policy inertia or persistent policy shocks ? is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary ...
Working Paper
Using Brexit to Identify the Nature of Price Rigidities
Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent ...
Journal Article
Finding normal: natural rates and policy prescriptions
Over the past several years, the Federal Open Market Committee?s longer-run forecasts of the short-term interest rate and unemployment rate have steadily declined. These forecasts reflect the Committee?s views about the levels of the policy interest rate and unemployment rate that will eventually prevail when the economy returns to normal. A simple monetary policy rule illustrates how the reductions in these forecasts can imply a lower projected path for the policy rate.
Working Paper
Foreign stock holdings: the role of information
The household finance literature documents a large fraction of the population not participating in stock markets. It is also puzzling that a much greater share of households do not participate in foreign stock markets. Recent empirical evidence points towards the role of information in determining agents' portfolio choices. I test these results into a model that incorporates information on agents' portfolio allocation decision. In the model, consumers can invest in both domestic and foreign stocks and to update their information set, agents have to pay a cost implying that consumers update ...
Journal Article
Have long-term inflation expectations declined?
Based on surveys of professional forecasters, expectations for price inflation 5 to 10 years ahead have edged down over the past few years. This decline seems to be primarily driven by revised expectations from forecasters who overestimated inflation in the aftermath of the Great Recession. Currently, the median survey-based expectation for long-term inflation is close to its pre-recession level and appears well anchored at the Fed?s 2% longer-run inflation objective.
Working Paper
Approximating Multisector New Keynesian Models
We show that a calibrated three-sector model with a suitably chosen distribution of price stickiness can closely approximate the dynamic properties of New Keynesian models with a much larger number of sectors. The parameters of the approximate three-sector distribution are such that both the approximate and the original distributions share the same (i) average frequency of price changes, (ii) cross-sectional average of durations of price spells, (iii) cross-sectional standard deviation of durations of price spells, (iv) the cross-sectional skewness of durations of price spells, and (v) ...