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Working Paper
The Federal Reserve's framework for monetary policy - recent changes and new questions
In recent years, the Federal Reserve has made substantial changes to its framework for monetary policymaking by providing greater clarity regarding its objectives, its intentions regarding the use of monetary policy--including nontraditional policy tools such as forward guidance and asset purchases--in the pursuit of those objectives, and its broader policy strategy. These changes reflected both a response to changes in economists' understanding of the most effective way to implement monetary policy and a response to specific challenges posed by the financial crisis and its aftermath, ...
Working Paper
Simplicity versus optimality the choice of monetary policy rules when agents must learn
The monetary policy rules that are widely discussed--notably the Taylor rule--are remarkable for their simplicity. One reason for the apparent preference for simple ad hoc rules over optimal rules might be the assumption of full information maintained in the computation of an optimal rule. Arguably this makes optimal control rules less robust to model specification errors. In this paper, we drop the full-information assumption and investigate the choice of policy rules when agents must learn the rule that is in use. To do this, we conduct stochastic simulations on a small, estimated ...
Working Paper
Errors in the measurement of the output gap and the design of monetary policy
We exploit data on historical revisions to real-time estimates of the output gap to examine the implications of measurement error for the design of monetary policy, using the Federal Reserve's model of the U.S. economy, FRB/US. Measurement error brings about a substantial deterioration in economic performance, although the problem can be mitigated somewhat by reducing the coefficient on the output gap in policy rules. We also show that it is usually optimal to place some weight on the level of the output gap in the conduct of policy, but under extreme conditions it may be preferable to focus ...
Working Paper
Real-time model uncertainty in the United States: the Fed from 1996-2003
We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model's inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and ...
Working Paper
Expectations, learning and the costs of disinflation: experiments using the FRB/US model
The costs of disinflation are explored using the Board's new sticky-price rational expectations macroeconometric model of the U.S. economy, FRB/US. The model nests both model consistent and `restricted-information rational' expectations. Monetary policy is governed by interest-rate reaction functions of which two are considered: the well-known Taylor rule and another rule that is more aggressive and richer in its specification, estimated using data for the last 15 years. Agents are required to learn of shifts of the inflation target using linear updating rules. The simulated costs of ...
Working Paper
Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability
This paper reviews the literature examining how the introduction of a retail CBDC would affect the banking sector and financial stability. A CBDC has the potential to improve welfare by reducing financial frictions, countering market power in deposit markets and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays ...
Working Paper
Inflation targeting and target instability
Monetary policy is modeled as governed by a known rule, except for a time-varying target rate of inflation. The variable target is taken as representing either discretionary deviations from the rule, or as the outcome of a policymaking committee that is unable to arrive at a consensus. Stochastic simulations of FRB/US, the Board of Governors' large, rational-expectations model of the U.S. economy, are used to examine the benefits of reducing the variability in the target rate of inflation. We find that putting credible boundaries on target variability introduces an important non-linearity in ...