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Author:Cairó, Isabel 

Working Paper
Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate

Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of ...
Finance and Economics Discussion Series , Paper 2020-066

Journal Article
The Asymmetric Costs of Misperceiving R-star

The natural rate of interest, or r-star, is used to evaluate whether monetary policy is restrictive or supportive of economic activity. However, this benchmark rate can only be estimated, and policymakers’ misperceptions of the level of the natural rate can carry substantial economic costs in terms of unemployment and inflation. A scenario using mistaken perceptions shows that the costs of overestimating the natural rate are greater than the cost of underestimating it if policy space is limited by the effective lower bound on the nominal federal funds rate.
FRBSF Economic Letter , Volume 2021 , Issue 01 , Pages 01-05

Working Paper
Elasticities of Labor Supply and Labor Force Participation Flows

REVISED MARCH 2019 Using a representative-household search and matching model with endogenous labor force participation, we study the interactions between extensive-margin labor supply elasticities and the cyclicality of labor force participation flows. Our model successfully replicates salient business-cycle features of all transition rates between three labor market states, the unemployment rate, and the labor force participation rate, while using values of elasticities consistent with micro evidence. Our results underscore the importance of the procyclical opportunity cost of employment, ...
Working Papers , Paper 19-3

Working Paper
The Cyclicality of Labor Force Participation Flows: The Role of Labor Supply Elasticities and Wage Rigidity

Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the behavior of transition rates implies that the participation margin is strongly countercyclical: the household’s incentive to send more workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) the procyclical values of non-market activities and (ii) wage ...
Working Papers , Paper 20-23

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