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Working Paper
Households' Preferences Over Inflation and Monetary Policy Tradeoffs
We document novel facts about US household preferences over inflation and monetary policy tradeoffs. Many households were attentive to news about monetary policy and to interest rates in 2023. The median household perceives the Federal Reserve's inflation objective to be 3 percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on ...
Working Paper
Double Inertia, Taylor Rules, and Monetary Policy Gradualism
In recent decades, an empirically estimated double-inertial rule fits the path of changes in the federal funds rate better than a standard inertial Taylor rule. Inertial Taylor rules aim to capture monetary policy gradualism via slow adjustments in the level of the policy rate. Double-inertial rules build on this specification by also gradually adjusting the pace of change in the policy rate. Because a double-inertial rule explains more than twice the variation of changes in the policy rate than its standard inertial counterpart, we argue that practitioners should consider a double-inertial ...
Working Paper
A Likelihood-Based Comparison of Macro Asset Pricing Models
We estimate asset pricing models with multiple risks: long-run growth, long-run volatility, habit, and a residual. The Bayesian estimation accounts for the entire likelihood of consumption, dividends, and the price-dividend ratio. We find that the residual represents at least 80% of the variance of the price-dividend ratio. Moreover, the residual tracks most recognizable features of stock market history such as the 1990's boom and bust. Long run risks and habit contribute primarily in crises. The dominance of the residual comes from the low correlation between asset prices and consumption ...
Working Paper
Learning and Misperception: Implications for Price-Level Targeting
Monetary policy strategies that target the price level have been advocated as a more effective way to provide economic stimulus in a deep recession when conventional monetary policy is limited by the zero lower bound on nominal interest rates. Yet, the effectiveness of these strategies depends on a central bank's ability to steer agents' expectations about the future path of the policy rate. We develop a flexible method of learning about the central bank's policy rule from observed interest rates that takes into account the limited informational content at the zero lower bound. When agents ...
Working Paper
The Role of Learning for Asset Prices and Business Cycles
I examine the implications of learning-based asset pricing in a model in which firms face credit constraints that depend partly on their market value. Agents learn about stock prices, but have conditionally model-consistent expectations otherwise. The model jointly matches key asset price and business cycle statistics, while the combination of financial frictions and learning produces powerful feedback between asset prices and real activity, adding substantial amplification. The model reproduces many patterns of forecast error predictability in survey data that are inconsistent with rational ...
Working Paper
Optimal Unemployment Insurance and International Risk Sharing
We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to ...
Working Paper
How Robust Are Makeup Strategies to Key Alternative Assumptions?
We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations. We survey empirical evidence on the behavior of shorter-run and long-run inflation expectations. Using simulations from the FRB/US macroeconomic model, we find that makeup strategies can moderately offset the real effects of adverse economic shocks, even when much of the public is uninformed about the monetary strategy. We also discuss the robustness of makeup ...
Working Paper
Computation of Policy Counterfactuals in Sequence Space
We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints in sequence space. Forecasts of the variables relevant for the policy problem, and their impulse responses to anticipated policy shocks, constitute sufficient information to construct valid counterfactuals. Knowledge of the structural model equations or filtering of structural shocks is not required. We solve for deterministic and stochastic paths under instrument rules as well as under optimal policy with commitment or subgame-perfect discretion. As an application, we ...
Working Paper
Impulse-Based Computation of Policy Counterfactuals
We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints. The procedure does not require knowledge of the structural or reduced-form equations of the model, its state variables, or its shock processes. Forecasts of the variables entering the policy problem, and impulse response functions of these variables to anticipated policy shocks under an arbitrary policy, constitute sufficient information to construct valid counterfactuals. We show how to compute solutions for instrument rules and optimal discretionary and commitment ...
Working Paper
The Factor Structure of Disagreement
We estimate a Bayesian three-dimensional dynamic factor model on the individual forecasts in the Survey of Professional Forecasters. The factors extract the most important dimensions along which disagreement comoves across variables. We interpret our results through a general semi-structural dispersed information model. The two most important factors in the data describe disagreement about aggregate supply and demand, respectively. Up until the Great Moderation, supply disagreement was dominant, while in recent decades and particularly during the Great Recession, demand disagreement was most ...