Why Is the Fed’s Balance Sheet Still So Big?
The Federal Reserve?s balance sheet is significantly larger today than it was before the financial crisis of 2008?2009. Rising demand for currency due to greater economic activity is partly responsible for this increase. The balance sheet will also need to remain large because the Federal Reserve now implements monetary policy in a regime of ample reserves, using a different set of tools than in the past to achieve its interest rate target.
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated ...
Communicating Monetary Policy Rules
Despite the ubiquity of inflation targeting, central banks communicate their frameworks in a variety of ways. No central bank explicitly expresses their conduct via a policy rule, which contrasts with models of policy. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, inflation ...
Aggregate Implications of Changing Sectoral Trends
We fi nd disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specif c trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and ...
Aggregate Implications of Changing Sectoral Trends
We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and ...
Expectations of large-scale asset purchases
During and after the recent financial crisis, the Federal Reserve turned to a number of unconventional tools to bolster the economy. The effectiveness of one such tool, large-scale asset purchases (LSAPs)?often referred to as quantitative easing?has been hard to measure. ; Efforts to estimate LSAP impact have often relied on an "event study" approach, focusing on short time intervals around the announcements of new LSAP programs. But these studies typically ignore the fact that financial market participants sometimes expect a given LSAP announcement in advance?and such expectations can ...
Anatomy of a Pandemic Recovery Across Sectors and Regions
Many have highlighted the disproportionate effect of the COVID-19 pandemic on certain sectors of the economy. The Bureau of Labor Statistics publishes data on employment by sector and state, which can show the fall and recovery in employment over the past two years at a disaggregated level. We find that just four of 10 sectors account for 75 percent of the fall in total employment during the pandemic. State-sector pairings with more dramatic falls in employment tended to see faster recoveries to compensate, indicating these job losses were often temporary separations. We also find evidence ...
The Effects of Permanent and Transitory Shocks under Imperfect Information
We study an economic environment affected by shocks that may be either permanent or transitory in nature. Contrary to the standard perfect information setup, we assume that households cannot distinguish between the two types of shocks. We describe how to solve the model under this imperfect information assumption in the context of the one-sector neoclassical model. We show that the solution involves a recasting of the driving process in terms of estimates of the exogenous states and forecast errors made by households rather than the states themselves. Given observations on the driving ...
The Highs and Lows of Productivity Growth
Productivity growth shows evidence of switching between long periods of high and low average growth. Estimates suggest that the United States has been in the low-growth regime since 2004. Assuming this low growth continues, productivity growth in the year 2025 would be 0.6%. By dropping this assumption and allowing for a switch to consistent higher growth, an alternative estimate forecasts that the distribution of possible productivity growth across quarters could average about 1.1% in 2025.
Permanent and Transitory Effects of the 2008–09 Recession
Separating U.S. economic output into permanent and transitory components can help explain the effects of recessions and expansions. GDP growth shifted to a lower trend rate in 2000, indicating a slowdown long before the 2008–09 recession. GDP was substantially above trend before that recession; it then declined significantly and did not recover to its trend rate until 2017. The recession resulted in permanent losses to GDP. Without those permanent effects, GDP at the end of the latest expansion would have been about $380 billion or $1,460 per person higher.