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Working Paper
Co-movement in sticky price models with durable goods
In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by ...
Working Paper
Asset prices, nominal rigidities, and monetary policy
Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.
Journal Article
Monetary policy rules and stability: inflation targeting versus price-level targeting
Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But because banks base their actions on forecasts of future inflation, following the rule can lead to inflation-rate instability in some cases. A price-level target offers the same benefits as an inflation target but, because actions are based on past inflation, it avoids this vulnerability.
Working Paper
Indexed debt contracts and the financial accelerator
This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
Journal Article
Gaps versus growth rates in the Taylor Rule
There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.
Journal Article
Perils of price deflations: an analysis of the Great Depression
If a central bank adopted a zero inflation target, it would, in practice, occasionally deviate up and down from that rate, and the economy would experience episodes of mild inflation and deflation. Is deflation-a decrease in the level of prices-a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect of massive price declines on output during the Great Depression. The authors find that while deflation can cause output to decline, mild episodes of ...
Journal Article
Milton Friedman, teacher, 1912-2006
Nobel laureate Milton Friedman, who died on November 16, 2006, made monumental contributions to economics and changed the course of modern central banking. Many of his proposals for the conduct of monetary policy were controversial at the time he made them but are now widely accepted. This Commentary reviews some of them.
Working Paper
Estimating contract indexation in a financial accelerator model
This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model ...
Working Paper
Comments on backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability
Benhabib, Schmitt-Grohe, and Uribe (2003) argue that if you relied solely on local analysis you would be led to believe that aggressive, backward-looking interest rate rules are sufficient for determinacy. But from the perspective of global analysis, backward-looking rules do not guarantee uniqueness of equilibrium and indeed may lead to cyclic and even chaotic equilibria. This comment argues that this result is premature. We utilize a discrete time model and make two observations. First, compared to their continuous time model, the cyclic equilibria under a backward-looking rule are much ...
Journal Article
The benefits of interest rate targeting: a partial and a general equilibrium analysis
An argument that an interest rate peg is desirable because it mitigates the distortions that arise in a monetary economy, and that money growth should be procyclical in order to achieve the interest rate peg.