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Working Paper
Some Implications of Uncertainty and Misperception for Monetary Policy
When choosing a strategy for monetary policy, policymakers must grapple with mismeasurement of labor market slack, and of the responsiveness of price inflation to that slack. Using stochastic simulations of a small-scale version of the Federal Reserve Board?s principal New Keynesian macroeconomic model, we evaluate representative rule-based policy strategies, paying particular attention to how those strategies interact with initial conditions in the U.S. as they are seen today and with the current outlook. To do this, we construct a current relevant baseline forecast, one that is loosely ...
Discussion Paper
Macroeconomic Modeling of Financial Frictions for Macroprudential Policymaking : A Review of Pressing Challenges
Structural macroeconomic modeling plays a central role economic policy discussions. This note reviews some of the progress witnessed in recent years and challenges that remain.
Working Paper
Exchange rates, monetary policy statements, and uncovered interest parity: before and after the zero lower bound
While uncovered interest parity (UIP) fails unconditionally, UIP conditional on monetary policy actions remains a cornerstone of macroeconomic models used for monetary policy analysis. We posit that monetary policy actions are partially revealed by FOMC statements and propose a new identification strategy to uncover the degree to which such policy actions induce comovement in exchange rates and long-term interest rates consistent with uncovered interest parity. We reach three conclusions. First, there is evidence in favor of UIP at long horizons, conditional on monetary policy actions, for ...
Working Paper
How has the monetary transmission mechanism evolved over time?
We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission - the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand - have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as ...
Working Paper
Unemployment Risk
Fluctuations in upside risks to unemployment over the medium term are examined using quantile regressions. U.S. experience reveals an elevated risk of large increases in unemployment when inflation or credit growth is high and when the unemployment rate is low. Inflation was a significant contributor to unemployment risk in the 1970s and early 1980s, and fluctuations in credit have contributed importantly to unemployment risk since the 1980s. Fluctuations in upside risk to unemployment are larger than fluctuations in the median outlook or downside risk to unemployment. Accounting for ...
Working Paper
Staggered price setting and real rigidities
This paper emphasizes the notion that model features that contribute to endogenous price rigidity under staggered price setting lower the elasticity of marginal cost with respect to output, and these same model features tend to generate equilibrium indeterminacy, or "sunspot fluctuations", under price flexibility. Using this insight, staggered price setting is shown to imply persistent output responses to monetary shocks for certain parameterizations of one- and two-sector models with small increasing returns or countercyclical markups, and other model features that would contribute to ...
Working Paper
The aggregate demand effects of short- and long-term interest rates
I develop empirical models of the U.S. economy that distinguish between the aggregate demand effects of short- and long-term interest rates-one with clear "microfoundations" and one more loosely motivated. These models are estimated using government and private long-term bond yields. Estimation results suggest short- and long-term interest rates both influence aggregate spending. The results indicate that the short-term interest rate has a larger influence on economic activity, through its impact on the entire term structure, than term and risk premiums (for equal-sized movements in ...
Working Paper
Mapping Heat in the U.S. Financial System
We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging ...
Working Paper
Quantitative Easing and the “New Normal” in Monetary Policy
Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when ...
Working Paper
Monetary policy statements, Treasury yields, and private yields: before and after the zero lower bound
Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing - both "unconventional" strategies. We examine whether the effect of such actions on Treasury yields have passed through to private yields to a degree comparable to experience before 2008. In order to perform this examination, we propose a strategy to identify the comovement between Treasury yields and private yields induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available, or when other ...