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Working Paper
Do Phillips Curves Conditionally Help to Forecast Inflation?
This paper reexamines the forecasting ability of Phillips curves from both an unconditional and conditional perspective by applying the method developed by Giacomini and White (2006). We find that forecasts from our Phillips curve models tend to be unconditionally inferior to those from our univariate forecasting models. Significantly, we also find conditional inferiority, with some exceptions. When we do find improvement, it is asymmetric - Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. Any improvement we find, ...
Working Paper
Informational implications of interest rate rules
Returning to a topic first systematically treated by Poole (1970) in a textbook Keynesian model, this paper compares interest rate and money supply rules. Our analysis, by contrast, is conducted within a rational expectations macro model that incorporates flexible prices and informational frictions. With differential information, interest rate targets can affect the information content of market prices and real activity, but these real consequences can always be replicated by an appropriately chosen money stock rule with feedback to economic activity. However, when the policy authority has ...
Working Paper
On the implementation of Markov-Perfect interest rate and money supply rules : global and local uniqueness
Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. This literature usually solves for the optimal allocations that are consistent with a rational expectations market equiibrium, but it does not study how the policy can be implemented given the available policy instruments. Recently, however, King and Wolman (2004) have shown that a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money ...
Journal Article
Reforming deposit insurance: lessons from the savings and loan crisis
A history of the collapse of the savings and loan industry. The authors contend that FSLICs institutional structures, established decades ago, made a thrift crisis inevitable. Poorly designed incentive structures strongly encouraged regulators and thrift managers to delay proper action when thrifts became insolvent. The authors present recommendations to prevent a recurrence of the crisis.
Working Paper
The effects of cash management practices on the demand for demand deposits
During the mid-1970s standard regressions explaining the demand for money underwent a well documented shift. This shift was largely attributed to the adoption of a more sophisticated methods of cash management practices by firms. ; A version of this work was published in the Federal Reserve Bank of Richmond's Economic Review, 1984, Vol. 70, No. 5
Journal Article
Where Is Everybody? The Shrinking Labor Force Participation Rate
More Americans are neither working nor looking for work. What is going on?
Working Paper
Some not so unpleasant monetarist arithmetic
This paper analyzes the quantitative significance of Sargent and Wallace's (1981) "Some Unpleasant Monetarist Arithmetic" in a model that is parameterized to correspond with U.S. data. The major result is that the monetarist arithmetic is not overly unpleasant and that the nominal side of the economy is not very sensitive to whether money growth does or does not respond to government debt.
Journal Article
DSGE models and their use in monetary policy
The past 10 years or so have seen the development of a new class of models that are proving useful for monetary policy: dynamic stochastic general equilibrium (DSGE) models. Many central banks around the world, including the Swedish central bank, the European Central Bank, the Norwegian central bank, and the Federal Reserve, use these models in formulating monetary policy. In this article, Mike Dotsey discusses the major features of DSGE models and why these models are useful to monetary policymakers. He outlines the general way in which they are used in conjunction with other tools commonly ...
Journal Article
An examination of international trade data in the 1980s
This article examines three competing hypotheses and their ability to explain events in international financial markets during the 1980s. The rival hypotheses view the trade deficit as caused alternatively by large U.S. budget deficits, by tight U.S. monetary policy, or by real shocks to investment resulting from changes in the U.S. tax code. While no entirely consistent explanation emerges, the real-shock hypothesis seems to match the data best.
Working Paper
Inflation uncertainty and growth in a simple monetary model
This paper analyzes the effects of inflation variability on economic growth in a model where money is introduced via a cash-in-advance constraint. In this setting, we find that inflation adversely affects long-run growth, even when the cash-in-advance constraint applies only to consumption. At the same time, we find that inflation and growth are positively related in the short-run. In addition, variability tends to increase average growth through a precautionary savings motive. Since inflation and inflation variability tend to be highly correlated, this latter effect attenuates the negative ...