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Author:Paustian, Matthias 

Working Paper
Household Debt and the Heterogeneous Effects of Forward Guidance

We develop an incomplete-markets heterogeneous agent New-Keynesian (HANK) model in which households are allowed to lend and borrow, subject to a borrowing constraint. We show that, in this framework, forward guidance, that is the promise by the central bank to lower future interest rates, can be a powerful policy tool, especially when the economy is in a liquidity trap. In our model, the power of forward guidance is amplified by three redistributive channels, absent in a representative agent new- Keynesian model (RANK) or in a HANK model without private debt. First, expected lower rates imply ...
International Finance Discussion Papers , Paper 1267

Working Paper
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit

We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in ...
Finance and Economics Discussion Series , Paper 2019-003

Report
Coordinating monetary and macroprudential policies

The financial crisis has prompted macroeconomists to think of new policy instruments that could help ensure financial stability. Policymakers are interested in understanding how these should be set in conjunction with monetary policy. We contribute to this debate by analyzing how monetary and macroprudential policy should be conducted to reduce the costs of macroeconomic fluctuations. We do so in a model in which such costs are driven by nominal rigidities and credit constraints. We find that, if faced with cost-push shocks, policy authorities should cooperate and commit to a given course of ...
Staff Reports , Paper 653

Working Paper
Indexed debt contracts and the financial accelerator

This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
Working Papers (Old Series) , Paper 1117

Working Paper
How inflationary is an extended period of low interest rates?

Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals ...
Working Papers (Old Series) , Paper 1202

Working Paper
Estimating contract indexation in a financial accelerator model

This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model ...
Working Papers (Old Series) , Paper 1216

Working Paper
Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration

This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller.
Working Papers (Old Series) , Paper 1215

Working Paper
Inflation persistence, inflation targeting and the Great Moderation

There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980?s. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation.
Working Papers (Old Series) , Paper 0721

Working Paper
Privately optimal contracts and suboptimal outcomes in a model of agency costs

This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner?s ...
Working Papers (Old Series) , Paper 1239

Working Paper
Privately optimal contracts and suboptimal outcomes in a model of agency costs

This paper derives the privately optimal lending contract in the celebrated fi nancial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing as it exacerbates fluctuations in real activity. The household?s desire to hedge business cycle risk, leads, via the fi nancial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner outcome) is quite ...
Working Papers (Old Series) , Paper 1204

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