Search Results
Journal Article
Macroeconomic implications of changes in the term premium
Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. This paper investigates these implications using both a structural model and a reduced-form framework. The authors show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the ...
Working Paper
Uncertainty, learning, and gradual monetary policy
The value of a vast array of financial assets are functions of rates or prices determined in OTC, interbank, or other off-exchange markets. In order to price such derivative assets, underlying rate and price indexes are routinely sampled and estimated. To guard against misreporting, whether unintentional or for market manipulation, many standard contracts utilize a technique known as trimmed-means. This paper points out that this polling problem falls within the statistical framework of robust estimation. Intuitive criteria for choosing among robust valuation procedures are discussed. In ...
Working Paper
A monetary policy rule based on nominal and inflation-indexed Treasury yields
The yields on nominal and inflation-indexed Treasury debt securities can be used to derive a proxy for the inflation expectations of market participants. This paper investigates whether such a measure has provided a useful guide for monetary policy decisions by the Federal Reserve. The results indicate that since 1999, U.S. monetary policy decisions can be effectively characterized by a simple policy rule in which changes in the federal funds rate respond to the forward rate of inflation compensation.
Speech
Preparing for a smooth (eventual) exit
Remarks at the National Association for Business Economics Policy Conference, Arlington, Virginia
Working Paper
Monetary policy alternatives at the zero bound: an empirical assessment
The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on "non-standard" policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news ...
Working Paper
Central bank talk: does it matter and why?
Statements released by the Federal Open Market Committee (FOMC) and congressional testimony by Chairman Greenspan are found to significantly affect market interest rates, indicating that central bank "talk" conveys important information to market participants. These effects arise not only because the statements provide information about the near-term policy inclinations of the FOMC but also because the statements convey information about the outlook for the economy. By contrast, statements raising questions about asset valuations typically have not generated a significant response of those ...
Working Paper
Does mortgage hedging amplify movements in long-term interest rates?
The growth of the mortgage market in recent years has raised the question of what effects, if any, the hedging of mortgage portfolios has on the behavior of long-term interest rates. This paper finds that the volatility of the ten-year swap rate implied by swaptions increases when the prepayment risk of outstanding mortgages increases--most likely because investors expect the hedging of prepayment risk to amplify future interest rate movements. These amplification effects can be considerable in magnitude, but they are generally expected to persist only for several months.
Working Paper
Anticipations of monetary policy in financial markets
In recent years, financial markets appear better able to anticipate FOMC policy changes. Beginning in the late 1980s and early 1990s, longer-term interest rates and futures rates have tended to incorporate movements in the federal funds rate several months in advance, in contrast to the largely contemporaneous response typically observed before that time. After identifying these emerging trends, the paper parses the enhanced predictability into a component that can be attributed to the autoregressive behavior of the funds rate and a non-autoregressive component. The paper considers ...
Working Paper
Spillovers across U.S. financial markets
Movements in the prices of different assets are likely to directly influence one another. This paper identifies the contemporaneous interactions between asset prices in U.S. financial markets by relying on the heteroskedasticity in their movements. In particular, we estimate a "structural-form GARCH" model that includes the short-term interest rate, the long-term interest rate, and the stock market. The results indicate that there are strong contemporaneous interactions between these variables. Accounting for this behavior is critical for interpreting daily changes in asset prices and for ...
Journal Article
Large-scale asset purchases by the Federal Reserve: did they work?
In this study, authors Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack review the Federal Reserve?s experience with implementing the LSAPs between late 2008 and March 2010. They explain that the target fed funds rate was set as low as possible in December 2008. Thus, to further ease the stance of monetary policy as the economic outlook deteriorated, the central bank purchased substantial quantities of assets with medium and long maturities?housing agency debt, agency mortgage-backed securities (MBS) and Treasuries?to drive down private borrowing rates. ; Title of Special Issue: ...