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Discussion Paper
The rational expectations approach to economic modelling
Discussion Paper
On distributed lag specifications of optimal factor adjustment paths
Working Paper
Term premia : endogenous constraints on monetary policy
Monetary policy evaluation using structural macro models suggests that historical monetary policy responds less aggressively to inflation and the output gap than would an optimal policy rule. However, these results are obtained using models with constant term premia. This paper shows how term premia may depend on the policy rule specification and policy rate uncertainty. A more aggressive policy rule involves an economically important increase in term premia. Consequently, conclusions about the specification of optimal monetary policy rules based on counterfactual simulations of models that ...
Working Paper
Term structure views of monetary policy
Term structure models and many descriptions of the transmission of monetary policy rest on the empirical relevance of the expectations hypothesis. Small differences in the perceived policy reaction function in VAR models of agent expectations strongly influence the relevance in the transmission mechanism of the expected short rate component of bond yields. Mean-reverting or difference-stationary characterizations of interest rates require large and volatile term premiums to match the observable term structure. However, short rate descriptions that capture shifting perceptions of long-horizon ...
Working Paper
Vector rational error correction
Systems of forward-looking linear decision rules can be formulated as vector "rational" error correction models. The closed-form solution of the restricted error corrections is derived, and a full-information estimator is suggested. The error correction format indicates that the assumptions of convex adjustment costs and rational expectations impose different types of a priori restrictions on the dynamic structure of the error corrections. An empirical model of the producer decision rule for capital investment illustrates that the data rejects dynamic restrictions imposed by a standard ...
Working Paper
Alternative sources of the lag dynamics of inflation
Data on credit ratings by the agencies with the legal status of Nationally-Recognized Statistical Rating Organizations (NRSROs) show some tendency for one-day downgrades that start from the lowest investment grade, BBB-, to travel more grades than those from neighboring grades. This would be consistent with the lower threshold of the NRSROs? grade BBB- being at a substantial default probability, but also could occur simply because downgrades to junk severely impair some firms? operations. A comparison of data from a non-NRSRO agency and an NRSRO shows that the latter?s regrades from BBB moved ...