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Author:Bundick, Brent 

Working Paper
Uncertainty shocks in a model of effective demand
This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, the authors find that increased uncertainty about the future may indeed have played a significant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press.
AUTHORS: Bundick, Brent; Basu, Susanto
DATE: 2012

Journal Article
How Do FOMC Projections Affect Policy Uncertainty?
In January 2012, the Federal Open Market Committee (FOMC) began publicly releasing its participants? projections for the future value of the federal funds rate. The former FOMC Chair Ben Bernanke stated that these releases help the public form policy expectations. However, Federal Reserve Bank of San Francisco President John C. Williams noted that the range of the funds rate forecast conveyed disagreement and uncertainty. These projections may be conflicting in nature, and thus may not lower public uncertainty. Bundick and Herriford seek to answer the question: do these projections decrease or increase uncertainty about future policy? To answer this question, the authors measure how uncertainty about future interest rates changed after the FOMC began releasing its participants? projections for the appropriate federal funds rate. The authors found that the overall uncertainty about future interest rates decreased after FOMC began releasing its participants? interest rate projections. However, the authors found that public uncertainty is correlated with disagreement across participants? projections. In sum, the findings provide empirical support for the claims of Bernanke and Williams.
AUTHORS: Herriford, Trenton; Bundick, Brent
DATE: 2017-04

Journal Article
Estimating the Monetary Policy Rule Perceived by Forecasters
Brent Bundick examines whether the FOMC?s implicit monetary policy rule, as perceived by professional forecasters, changed when the federal funds rate reached its effective lower bound. The article is summarized in The Macro Bulletin.
AUTHORS: Bundick, Brent
DATE: 2015-10

Conference Paper
Housing, housing finance, and monetary policy: an introduction to the Bank's 2007 Economic Symposium
AUTHORS: Bundick, Brent; Sellon, Gordon H.
DATE: 2007

Working Paper
Do federal funds futures need adjustment for excess returns? a state-dependent approach
This paper utilizes a Markov-switching framework to model excess returns in federal funds futures contracts. This framework identifies a high-volatility state where excess returns are large, positive, and volatile and a low-volatility state where excess returns have a lower volatility and are small in absolute value. Federal funds futures rates require adjustment for excess returns only in the high-volatility state. Intermeeting rate cuts of the federal funds rate target always correspond with the high-volatility regime and can explain much of the variation in excess returns. This paper also examines previous return models and helps clarify the relationship between excess returns, business cycles, and intermeeting rate cuts. In real-time forecasting, however, the unadjusted futures rates outperform three different forecasting models. This result strengthens the case for unadjusted futures rates as a measure of monetary policy expectations.
AUTHORS: Bundick, Brent
DATE: 2007

Working Paper
Uncertainty shocks in a model of effective demand
Can increased uncertainty about the future cause a contraction in output and its components? An identified uncertainty shock in the data causes significant declines in output, consumption, investment, and hours worked. Standard general-equilibrium models with flexible prices cannot reproduce this comovement. However, uncertainty shocks can easily generate comovement with countercyclical markups through sticky prices. Monetary policy plays a key role in offsetting the negative impact of uncertainty shocks during normal times. Higher uncertainty has even more negative effects if monetary policy can no longer perform its usual stabilizing function because of the zero lower bound. We calibrate our uncertainty shock process using fluctuations in implied stock market volatility and show that the model with nominal price rigidity is consistent with empirical evidence from a structural vector autoregression. We argue that increased uncertainty about the future likely played a role in worsening the Great Recession.
AUTHORS: Basu, Susanto; Bundick, Brent
DATE: 2014-11-01

Working Paper
Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications
High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical findings have implications for the term structure of interest rates in the United States. In a calibrated macro-finance model, we show that the apparent anchoring of inflation expectations implies lower term premiums in longer-term bond yields and decreases the slope of the yield curve.
AUTHORS: Bundick, Brent; Smith, Andrew Lee
DATE: 2018-01-01

Working Paper
The dynamic effects of forward guidance shocks
We examine the macroeconomic effcts of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical findings. To estimate our theoretical model, we generate a model-implied futures curve which closely links our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks around policy announcements and the predictions from a standard theoretical model.
AUTHORS: Bundick, Brent; Smith, Andrew Lee
DATE: 2016-01-15

Working Paper
Uncertainty Shocks in a Model of Effective Demand: Reply
de Groot, Richter, and Throckmorton (2018) argue that the model in Basu and Bundick (2017) can match the empirical evidence only because the model assumes an asymptote in the economy?s response to an uncertainty shock. In this Reply, we provide new results showing that our model?s ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment?s critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes.
AUTHORS: Basu, Susanto; Bundick, Brent
DATE: 2018-07-13

Working Paper
Forward Guidance, Monetary Policy Uncertainty, and the Term Premium
We examine the macroeconomic and term-premia implications of monetary policy uncertainty shocks. Using Eurodollar options, we employ the VIX methodology to measure implied volatility about future short-term interest rates at various horizons. We identify monetary policy uncertainty shocks using the unexpected changes in this term structure of implied volatility around monetary policy announcements. {{p}} Two principal components succinctly characterize these changes around policy announcements, which have the interpretation as shocks to the level and slope of the term structure of implied interest rate volatility. We find that an unexpected decline in the slope of implied volatility lowers term premia in longer-term bond yields and leads to higher economic activity and inflation. {{p}} Our results suggest that forward guidance about future monetary policy can materially affect bond market term premia, even without large-scale asset purchases.
AUTHORS: Bundick, Brent; Smith, Andrew Lee; Herriford, Trenton
DATE: 2017-07-12


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