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Report
Disciplined discretion: the German and Swiss monetary targeting frameworks in operation
Many observers have held up the records of price stability in Germany and in Switzerland as examples of the benefits of a monetary targeting regime. These claims have been juxtaposed in recent years with econometric analyses of Bundesbank policy which have shown an absence of dependable relationship between money growth, inflation, and policy movements. We offer an analysis of actual Bundesbank and Swiss National Bank monetary policy as it operated which explains this puzzling gap between performance and presumed policy. We confirm that neither country is a monetary targeter according to a ...
Report
Some comparative evidence on the effectiveness of inflation targeting
Does the adoption of an inflation target by a country have an effect on that country's rate of inflation and on inflation's interaction with real economic variables? Does inflation targeting alter private-sector expectations? The question of effectiveness must be posed as a counterfactual -did target adopting countries find economic benefits they would not have found had they not targeted? We offer three sets of measurements of the effect of inflation targeting: the first concerning whether the disinflation has been achieved at lower cost, or whether inflation has come down in targeters to a ...
Working Paper
The responses of wages and prices to technology shocks
This paper reexamines wage and price dynamics in response to permanent shocks to productivity. We estimate a micro-founded dynamic general equilibrium (DGE) model of the U.S. economy with sticky wages and sticky prices using impulse responses to technology and monetary policy shocks. We utilize a flexible specification for wage- and price-setting that allows for the sluggish adjustment of both the levels of these variables as in standard contracting models as well as intrinsic inertia in wage and price inflation. On the price front, we find that in our VAR inflation jumps in response to an ...
Working Paper
Measuring the Natural Rate of Interest: International Trends and Determinants
U.S. estimates of the natural rate of interest?the real short-term interest rate that would prevail absent transitory disturbances?have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams ...
Working Paper
Learning and shifts in long-run productivity growth
Shifts in the long-run rate of productivity growth are difficult, in real time, to distinguish from transitory fluctuations. We analyze the evolution of forecasts of long-run productivity growth during the 1970s and 1990s and examine in a dynamic general equilibrium model the consequences of learning on the responses to shifts in the long-run productivity growth rate. We find that an updating rule based on an estimated Kalman filter model using real-time data describes economists' long-run productivity growth forecasts extremely well. We then show that learning has profound implications for ...
Working Paper
Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence
We examine the macroeconomic effect of large-scale asset purchases (LSAPs) and forward guidance (FG) using a proxy structural VAR estimated on data through 2015, where the stance of the LSAP policy is measured using primary dealer expectations of the Federal Reserve's asset holdings. Monetary policy shocks are identified using instruments constructed from event study yield changes, and additional assumptions are employed to separately identify LSAP and FG shocks. We find that unexpected expansions in the Federal Reserve's asset holdings during the ZLB period between 2008 and 2015 had ...
Working Paper
The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies
After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools--quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate--in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time ...
Working Paper
Implications of habit formation for optimal monetary policy
We study the implications for optimal monetary policy of introducing habit formation in consumption into a general equilibrium model with sticky prices. Habit formation affects the model's endogenous dynamics through its effects on both aggregate demand and households' supply of output. We show that the objective of monetary policy consistent with welfare maximization includes output stabilization, as well as inflation and output gap stabilization. We find that the variance of output increases under optimal policy, even though it acquires a higher implicit weight in the welfare function. We ...
Working Paper
The responses of wages and prices to technology shocks
This paper reexamines wage and price dynamics in response to permanent shocks to productivity. We estimate a micro-founded dynamic general equilibrium (DGE) model of the U.S. economy with sticky wages and sticky prices using impulse responses to technology and monetary policy shocks. We utilize a flexible specification for wage- and price-setting that allows for the sluggish adjustment of both the levels of these variables-as in standard contracting models-as well as intrinsic inertia in wage and price inflation. On the price front, we find that in our VAR inflation jumps in response to an ...
Working Paper
Financial Stability and Optimal Interest-Rate Policy
We study optimal interest-rate policy in a New Keynesian model in which the economy can experience financial crises and the probability of a crisis depends on credit conditions. The optimal adjustment to interest rates in response to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to ...