Discussion Paper
New tools to monitor inflation in real time
Smith, Simon C.; Wolman, Alexander L. (2024-12-20)
From 1995 through February 2020 – a period when inflation was relatively low and stable – the rate of monthly total Personal Consumption Expenditures (PCE) inflation was tightly related to a measure of asymmetry in the distribution of price changes of its subcomponents. We document that relationship and use it to construct an "inflation Filter" to distinguish inflation that is broad-based from that which is idiosyncratic (explained by price changes in a small share of subcomponents). Our "Inflation Filter" can be viewed as a standard diffusion index in which the threshold each month is ...
FEDS Notes , Paper 2024-12-20-3

Discussion Paper
Monetary Policy in Uncertain Times
Smith, Simon C.; Timmermann, Allan; Wright, Jonathan H. (2024-08-30)
We investigate the effect of uncertainty surrounding the slope of the Phillips curve on optimal monetary policy. To do this, we first account for parameter uncertainty in a time-invariant Bayesian Phillips curve model. Second, we generalize this model to allow for instabilities in the form of breaks. In both the United States (US) and the European Union (EU), we identify a break around the turn of the century, after which the Phillips curve flattened. Finally, we show how breaks amplify uncertainty in the Phillips curve model, significantly impacting optimal monetary policy. Accounting for ...
FEDS Notes , Paper 2024-08-30-1

Working Paper
Factor Selection and Structural Breaks
Chib, Siddhartha; Smith, Simon C. (2024-05-31)
We develop a new approach to select risk factors in an asset pricing model that allows the set to change at multiple unknown break dates. Using the six factors displayed in Table 1 since 1963, we document a marked shift towards parsimonious models in the last two decades. Prior to 2005, five or six factors are selected, but just two are selected thereafter. This finding offers a simple implication for the factor zoo literature: ignoring breaks detects additional factors that are no longer relevant. Moreover, all omitted factors are priced by the selected factors in every regime. Finally, ...
Finance and Economics Discussion Series , Paper 2024-037

Discussion Paper
Nonlinear Phillips Curves
Smith, Simon C.; Timmermann, Allan; Wright, Jonathan H. (2024-09-04)
The slope of the Phillips curve flattened around the turn of the century. The slope, however, is also kinked (nonlinear) such that it is steeper in a tight labor market than in a more normal one. The magnitude of this kink means that the flattening of the Phillips curve around the turn of the century has not changed much the slope in a tight labor market. This holds for both price and wage Phillips curves and for both the United States (US) and the European Union (EU). Our findings are relevant to policy debates about the costs and benefits of a running a hot labor market. Monetary ...
FEDS Notes , Paper 2024-09-04-1