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Working Paper
The pitfalls of discretionary monetary policy.
In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable ? a ratio of predetermined prices ? there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a ...
Working Paper
Real implications of the zero bound on nominal interest rates
If monetary policy succeeds in keeping average inflation very low, nominal interest rates may occasionally be constrained by the zero lower bound. The degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price-setting. Policy rules that make the price level stationary lead to small real distortions from the zero bound. If policy imparts persistence into the inflation rate, the real implications of the zero bound are large in the presence of backward looking price-setting, and small if prices are set to maximize profits.
Working Paper
An inquiry into the existence and uniqueness of equilibrium with state-dependent pricing
State-dependent pricing models are now an operational framework for quantitative business cycle analysis. The analysis in Ball and Romer [1991], however, suggests that such models may be rife with multiple equilibria: in their static model price adjustment is always characterized by complementarity, a necessary condition for multiplicity. We study existence and uniqueness of equilibrium in a discrete-time state-dependent pricing model. In steady states of our model, we find only weak complementarity and no evidence of multiplicity. We likewise find no evidence of multiplicity in the presence ...
Working Paper
The optimal rate of inflation with trending relative prices
The relative prices of different categories of consumption goods have been trending over time. Assuming they are exogenous with respect to monetary policy, these trends imply that monetary policy cannot stabilize the prices of all consumption categories. If prices are sticky, monetary policy then must trade off relative price distortions within different categories of consumption. Optimally, more weight should be placed on stabilizing goods and services prices that are less flexible. Calibrating a simple sticky price model to U.S. data, we find that slight deflation is optimal, even absent ...
Briefing
Anticipated FOMC Policy, Inflation and Credibility
Following through on its September 2020 plan, the FOMC waited to raise interest rates until March 2022, when inflation was high and unemployment was below its perceived long-run level. However, by early fall 2021, markets were predicting a rate increase, and policymakers were signaling an increase in their Summary of Economic Projections. In contrast to the 1980s and 1990s, when the Fed fought inflation scares even as actual inflation trended down, long-term inflation expectations have been relatively stable even as actual inflation has risen far above target. This stability has likely been ...
Working Paper
Monetary discretion, pricing complementarity and dynamic multiple equilibria
In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price ...
Journal Article
Housing and the Great Recession : a VAR accounting exercise
We use a vector autoregression (VAR) for the components of gross domestic product (GDP) to conduct some sectoral and temporal accounting for the current recession. It is obvious that housing played an important role in the current recession, but residential investment declined for two years before GDP declined. According to the VAR, the level of GDP in the second quarter of 2009---the trough of the decline in GDP---was close to but above the level implied by the estimated sequence of VAR innovations to residential investment over the period 2006:Q1--2009:Q2. Until late 2007 other offsetting ...
Briefing
What Two Billion Retail Transactions Reveal about Consumers’ Choice of Payments
Although cash continues to be a major form of payment in retail transactions, data on the use of cash are challenging to obtain. Research at the Richmond Fed has exploited a large dataset of cash, check, credit card, and debit card transactions at a nationwide retail chain to examine consumer payment choice based on transaction size and location, day-of-week and day-of-month cycles, and longer-term trends.
Journal Article
Inflation Targeting in a St. Louis Model of the 21st Century