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Author:Aruoba, S. Boragan 

Working Paper
Macroeconomic Dynamics Near the ZLB : A Tale of Two Countries

We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s ...
International Finance Discussion Papers , Paper 1163

Working Paper
Real-time macroeconomic monitoring: real activity, inflation, and interactions

The authors sketch a framework for monitoring macroeconomic activity in real-time and push it in new directions. In particular, they focus not only on real activity, which has received most attention to date, but also on inflation and its interaction with real activity. As for the recent recession, the authors find that (1) it likely ended around July 2009; (2) its most extreme aspects concern a real activity decline that was unusually long but less unusually deep, and an inflation decline that was unusually deep but brief; and (3) its real activity and inflation interactions were strongly ...
Working Papers , Paper 10-5

Working Paper
Improving GDP measurement: a measurement-error perspective

We provide a new and superior measure of U.S. GDP, obtained by applying optimal signal-extraction techniques to the (noisy) expenditure-side and income-side estimates. Its properties -- particularly as regards serial correlation -- differ markedly from those of the standard expenditure-side measure and lead to substantially-revised views regarding the properties of GDP.
Working Papers , Paper 13-16

Working Paper
Macroeconomic dynamics near the ZLB: a tale of two equilibria

This paper studies the dynamics of a New Keynesian dynamic stochastic general equilibrium (DSGE) model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targeted-inflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targeted-inflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 2008-09 recession under the assumptions that the U.S. economy has been in either the targeted-inflation or the sunspot equilibrium. We consider ...
Working Papers , Paper 13-29

Working Paper
Assessing DSGE model nonlinearities

We develop a new class of nonlinear time-series models to identify nonlinearities in the data and to evaluate nonlinear DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage/price adjustment costs and use predictive checks to assess its ability to account for nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage/price rigidities, these do not spill ...
Working Papers , Paper 13-47

Working Paper
Term structures of inflation expectations and real interest rates

Revised September 2016. In this paper, I use a statistical model to combine various surveys to produce a term structure of inflation expectations--inflation expectations at any horizon--and an associated term structure of real interest rates. Inflation expectations extracted from this model track realized inflation quite well, and in terms of forecast accuracy, they are at par with or superior to some popular alternatives. Looking at the period 2008.2015, I conclude that long-run inflation expectations remained anchored, and the policies of the Federal Reserve provided a large level of ...
Working Papers , Paper 16-9

Working Paper
Real-time measurement of business conditions

We construct a framework for measuring economic activity in real time (e.g., minute-by-minute), using a variety of stock and flow data observed at mixed frequencies. Specifically, we propose a dynamic factor model that permits exact filtering, and we explore the efficacy of our methods both in a simulation study and in a detailed empirical example.
International Finance Discussion Papers , Paper 901

Conference Paper
Search, money, and capital: a neoclassical dichotomy

Recent work has reduced the gap between search-based monetary theory and mainstream macroeconomics by incorporating into the search model some centralized markets as well as some decentralized markets where money is essential. This paper takes a further step toward this integration by introducing labor, capital, and neoclassical firms. The resulting framework nests a search-theoretic monetary model and a standard neoclassical growth model as special cases.
Proceedings

Working Paper
Money and capital: a quantitative analysis

We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from ...
Working Papers , Paper 2009-031

Working Paper
Optimal fiscal and monetary policy when money is essential

We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. Our main results are in stark contrast to the prescriptions of earlier flexible-price Ramsey models. Two especially important findings emerge from our work: the Friedman Rule is typically not optimal and inflation is stable over time. Inflation is not a substitute instrument for a missing tax, as is sometimes the case in standard Ramsey models. Rather, the inflation tax is exactly the right tax to use ...
International Finance Discussion Papers , Paper 880

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