Central Bank Solvency and Inflation
The monetary base in the United States, defined as currency plus bank reserves, grew from about $800 billion in 2008 to $2 trillion in 2012, and to roughly $4 trillion at the end of 2014 (see chart below). Some commentators have viewed this increase in the monetary base as a sure harbinger of inflation. For example, one economist wrote that this “unprecedented expansion of the money supply could make the ’70s look benign.” These predictions of inflation rest on the monetarist argument that nominal income is proportional to the money supply. The fact that the money supply has expanded ...
Models of low-frequency behavior of time series may have strongly conflicting substantive implications while fitting the data nearly equally well. We should develop methods which display the resulting uncertainty rather than adopt modeling conventions which hide it. One step toward this goal may be to consider overparameterized stationary ARMA models.
MCMC method for Markov mixture simultaneous-equation models: a note
This paper extends the methods developed by Hamilton (1989) and Chib (1996) to identified multiple-equation models. It details how to obtain Bayesian estimation and inference for a class of models with different degrees of time variation and discusses both analytical and computational difficulties.
Bayesian methods for dynamic multivariate models
If multivariate dynamic models are to be used to guide decision-making, it is important that it be possible to provide probability assessments of their results. Bayesian VAR models in the existing literature have not commonly (in fact, not at all as far as we know) been presented with error bands around forecasts or policy projections based on the posterior distribution. In this paper we show that it is possible to introduce prior information in both reduced form and structural VAR models without introducing substantial new computational burdens. With our approach, identified VAR analysis of ...
Inflation expectations, uncertainty, the Phillips curve, and monetary policy
As with many important theories, the long run value of Phillips curve theories may lie in the new flames that are emerging from its dying embers.
Forecasting and conditional projection using realistic prior distribution
This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. We apply the procedure to 10 macroeconomic variables and show that it produces more accurate out-of-sample forecasts than univariate equations do. Although cross-variable responses are damped by the prior, our estimates capture considerable interaction among the variables. ; We provide unconditional forecasts as of 1982:12 and 1983:3. We also describe how a model such as this can be used to make conditional projections and analyze policy alternatives. As an example, we analyze a ...
Inflation and growth - commentary
Solving nonlinear stochastic optimization and equilibrium problems backwards
In a stochastic equilibrium model some stochastic processes are usually exogenously given, while others are either chosen optimally by agents or emerge from market equilibrium conditions. When we simulate such a model, often we aim at studying the relations among variables in the model as we vary parameters of policy and of behavior of economic agents. We are no more certain (indeed often less certain) of what is reasonable or interesting behavior for the exogenous variables (some of which may be unobservable) than of the variables chosen by agents or fixed in markets. It turns out that if we ...