Did easy money in the dollar bloc fuel the global commodity boom?
Among the various explanations for the runup in oil and commodity prices of recent years, one story focuses on the role of monetary policy in the United States and in developing economies. In this view, developing countries that peg their currencies to the dollar were forced to ease their monetary policies after reductions in U.S. interest rates, leading to economic overheating, excess demand for oil and other commodities, and rising commodity prices. We assess that hypothesis using the Federal Reserve staff?s forward-looking, multicountry, dynamic general equilibrium model, SIGMA. We find ...
Trade adjustment and the composition of trade
Oil shocks and the zero bound on nominal interest rates
Beginning in 2009, in many advanced economies, policy rates reached their zero lower bound (ZLB). Almost at the same time, oil prices started rising again. We analyze how the ZLB affects the propagation of oil shocks. As these shocks move inflation and output in opposite directions, their effects on economic activity are cushioned when monetary policy is constrained. The burst of inflation from an oil price increase lowers real interest rates at the ZLB and stimulates the interest-sensitive component of GDP, offsetting the usual contractionary effects. In fact, if the increase in oil prices ...
Trade adjustment and the composition of trade
A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the ...
Gali and Gertler (1999) are the first to find that the baseline sticky price model fits the U.S. data well. I examine the robustness of their estimates along two dimensions. First, I show that their IV estimates are not robust to an alternative normalization of the moment condition being estimated. However, when using a Monte Carlo study to investigate small-sample properties, I show that the normalization chosen by Gali and Gertler (1999) yields a superior estimator. Second, I check whether or not the proportion of backward-looking firms augmenting the baseline model to fit the data is ...
OccBin: A Toolkit for Solving Dynamic Models With Occasionally Binding Constraints Easily
We describe how to adapt a first-order perturbation approach and apply it in a piecewise fashion to handle occasionally binding constraints in dynamic models. Our examples include a real business cycle model with a constraint on the level of investment and a New Keynesian model subject to the zero lower bound on nominal interest rates. We compare the piecewise linear perturbation solution with a high-quality numerical solution that can be taken to be virtually exact. The piecewise linear perturbation method can adequately capture key properties of the models we consider. A key advantage of ...
Likelihood Evaluation of Models with Occasionally Binding Constraints
Applied researchers interested in estimating key parameters of DSGE models face an array of choices regarding numerical solution and estimation methods. We focus on the likelihood evaluation of models with occasionally binding constraints. We document how solution approximation errors and likelihood misspecification, related to the treatment of measurement errors, can interact and compound each other.
Collateral constraints and macroeconomic asymmetries
A model with collateral constraints displays asymmetric responses to house price changes. When housing wealth is high, collateral constraints become slack, and the response of consumption and hours to shocks that move house prices is positive yet small. When housing wealth is low, collateral constraints become tight, and the response of consumption and hours to house price changes is negative and large. This finding is corroborated using evidence from national, state-level, and MSA-level data. Wealth effects computed in normal times may underestimate the response to large house price ...
International competition and inflation: a New Keynesian perspective
We develop and estimate an open economy New Keynesian Phillips curve (NKPC) in which variable demand elasticities give rise to changes in desired markups in response to changes in competitive pressure from abroad. A parametric restriction on our specification yields the standard NKPC, in which the elasticity is constant, and there is no role for foreign competition to influence domestic inflation. By comparing the unrestricted and restricted specifications, we provide evidence that foreign competition plays an important role in accounting for the behavior of inflation in the traded goods ...
Optimal Dynamic Capital Requirements and Implementable Capital Buffer Rules
We build a quantitatively relevant macroeconomic model with endogenous risk-taking. In our model, deposit insurance and limited liability can lead banks to make risky loans that are socially inefficient. This excessive risk-taking can be triggered by aggregate or sectoral shocks that reduce the return on safer loans. Excessive risk-taking can be avoided by raising bank capital requirements, but unnecessarily tight requirements lower welfare by limiting liquidity producing bank deposits. Consequently, optimal capital requirements are dynamic (or state contingent). We provide examples in which ...