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Output Hysteresis and Optimal Monetary Policy
We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon we term output hysteresis. In the model, the incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing total factor productivity growth and generating a permanent loss in output. Using a purely quadratic approximation to welfare under endogenous growth, we derive normative implications for monetary policy. Away from the zero lower bound (ZLB), optimal commitment policy sets interest rates to eliminate ...
The Roles of Mobility and Masks in the Spread of COVID-19
This policy brief analyzes the effects of COVID-19 mitigation policies, those that restrict movement and activity and those that advocate public health best practices. The analysis uses US state-level data to estimate the effects of mobility, mask mandates, and compliance with these mandates on the numbers of COVID-19 cases and deaths. A one-standard-deviation increase in mobility is associated with an 11 to 20 basis points greater rate of growth in case counts; a mask mandate can offset about half of this increase. Slower growth in case counts ultimately translates into slower growth in ...
Fiscal Expansions in the Era of Low Real Interest Rates
Low natural real interest rates limit the power of monetary policy to revive the economy due to the zero lower bound (ZLB) on the nominal interest rate. Fiscal stabilization via higher government debt is frequently recommended as a policy to raise the natural real interest rate. This paper builds a non-Ricardian framework to study the tradeoffs associated with a debt-financed fiscal expansion and show that even in a low real interest rate environment, higher debt doesn’t necessarily raise the real interest rate. The effect of the expansion is non-monotonic: Increasing debt raises the ...
Consumption Heterogeneity by Occupation: Understanding the Impact of Occupation on Personal Consumption during the COVID-19 Pandemic
This paper exploits the variation in the unemployment rate of different occupations in the first part of the COVID-19 pandemic to analyze the response of consumption spending to unemployment risk. We find that earlier in the pandemic, higher unemployment risk did not reduce relative spending. However, as the pandemic proceeded, higher unemployment risk reduced relative spending. This pattern held across both essential and nonessential spending categories. We find that “high-risk” occupations had three common characteristics: lower ability to be performed from home, higher physical ...
The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries
We study the mortgage cash flow channel of monetary policy transmission under fixed-rate mortgage (FRM) versus adjustable-rate mortgage (ARM) regimes by comparing the United States with primarily long-term FRMs and Spain with primarily ARMs that automatically reset annually. We find a robust transmission of mortgage rate changes to spending in both countries but surprisingly a larger effect in the United States—and provide two explanations for this finding. First, there are channels of transmission other than the mortgage cash flow effect since other interest rates co-move with the mortgage ...