Search Results
Working Paper
Time-varying U.S. inflation dynamics and the New-Keynesian Phillips curve
This paper introduces a form of boundedly-rational expectations into an otherwise standard New-Keynesian Phillips curve. The representative agent's forecast rule is optimal (in the sense of minimizing mean squared forecast errors), conditional on a perceived law of motion for inflation and observed moments of the inflation time series. The perceived law of motion allows for both temporary and permanent shocks to inflation, the latter intended to capture the possibility of evolving shifts in the central bank's inflation target. In this case, the agent's optimal forecast rule defined by the ...
Journal Article
Federal Reserve credibility and inflation scares
We develop a simple, quantitative model of the U.S. economy to demonstrate how an "inflation scare " may occur when the Federal Reserve lacks full credibility. In particular, we show that the long-term nominal interest rate may undergo a sudden increase if an adverse movement in the inflation rate triggers a deterioration in the public's beliefs about the Federal Reserve's commitment to maintaining low inflation in the future. We find that simulations from our model capture some observed patterns of U.S. interest rates in the 1980s.
Working Paper
House prices, credit growth, and excess volatility: implications for monetary and macroprudential policy
Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. ...
Journal Article
Is public capital productive? A review of the evidence
An examination of the empirical evidence regarding the productive effects of public capital on the U.S. economy, concluding that although boosting infrastructure investment might have a positive impact on private output, the magnitude of the effect is unclear.
Journal Article
Can the stock market save Social Security?
Working Paper
Expectations, credibility, and disinflation in a small macroeconomic model
A study of the effects of expectations and central bank credibility on the economy's dynamic transition path during a disinflation. Using a version of the Fuhrer-Moore model, it compares simulations under different specifications that vary according to the way expectations are formed and the degree of central bank credibility.
Journal Article
Inflation-induced valuation errors in the stock market
A recent front-page article in the Wall Street Journal documented an increasing tendency among economists to move away from theories of efficient stock market valuation in favor of "behavioral" models that emphasize the role of irrational investors (see Hilsenrath 2004). The long-run rate of return on stocks is ultimately determined by the stream of corporate earnings distributions (cash flows) that accrue to shareholders. In assigning prices to stocks, efficient valuation theory says that rational investors should discount real cash flows using real interest rates or discount nominal ...
Journal Article
Gauging the impact of the Great Recession
The Great Recession of 2007?2009, coming on the heels of a spending binge fueled by a housing bubble, so far has resulted in over $7,300 in foregone consumption per person, or about $175 per person per month. The recession has had many costs, including negative impacts on labor and housing markets, and lost government tax revenues. The extensive harm of this episode raises the question of whether policymakers could have done more to avoid the crisis.
Working Paper
Tax reform with useful public expenditures
This paper examines the economic effects of tax reform in an endogenous growth model that allows for two types of useful public expenditures; one type contributes to human capital information while the other provides direct utility to households. We show that the optimal fiscal policy calls for full expensing of private investment which shifts the tax base to private consumption. The efficient levels of public investment and public consumption relative to output are uniquely pinned down by parameters that govern both technology and preferences. In general, implementing the optimal fiscal ...
Journal Article
Improving the Phillips Curve with an Interaction Variable
A key challenge for monetary policymakers is to predict where inflation is headed. One promising approach involves modifying a typical Phillips curve predictive regression to include an interaction variable, defined as the multiplicative combination of lagged inflation and the lagged output gap. This variable appears better able to capture the true underlying inflationary pressure associated with the output gap itself. Including the interaction variable helps improve the accuracy of Phillips curve inflation forecasts over various sample periods.