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Journal Article
How much of the fall in inflation can be explained by energy and import prices?
A. Lee Smith finds that recent declines in inflation may be due to historically large movements in oil prices and the foreign exchange value of the dollar.
Working Paper
When does the cost channel pose a challenge to inflation targeting central banks?
In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in ...
Working Paper
Should We Be Puzzled by Forward Guidance?
Although a growing literature argues output is too sensitive to future interest rates in standard macroeconomic models, little empirical evidence has been put forth to evaluate this claim. In this paper, we use a range of vector autoregression models to answer the central question of how much output responds to changes in interest rate expectations following a monetary policy shock. Despite distinct identification strategies and sample periods, we find surprising agreement regarding this elasticity across empirical models. We then show that in a standard model of nominal rigidity estimated ...
Journal Article
Did the Federal Reserve Anchor Inflation Expectations Too Low?
In 2012, the Federal Reserve adopted a 2 percent target for inflation to firmly anchor longer-term inflation expectations. Since then, inflation has averaged about 1.4 percent. Modern theories suggest that inflation should eventually gravitate toward measures of longer-run inflation expectations. The tendency for inflation to reside below the Federal Reserve’s 2 percent inflation target over much of the past decade raises questions of whether longer-run inflation expectations are anchored—and, if so, whether they are anchored below 2 percent.Brent Bundick and A. Lee Smith argue that the ...
Working Paper
A model of monetary policy shocks for financial crises and normal conditions
In late 2008, deteriorating economic conditions led the Federal Reserve to lower the federal funds rate to near zero and inject massive liquidity into the financial system through novel facilities. The combination of conventional and unconventional measures complicates the challenging task of characterizing the effects of monetary policy. We develop a novel method of identifying these effects that maintains the classic assumptions that a central bank reacts to output and the price level contemporaneously and may only affect these variables with a lag. A New-Keynesian DSGE model augmented with ...
Journal Article
Policymakers Have Options for Additional Accommodation: Forward Guidance and Yield Curve Control
With the federal funds rate near zero, policymakers are evaluating options for providing additional monetary policy accommodation, including a tool known as yield curve control. We find that despite low nominal Treasury yields, some scope for additional accommodation remains should policymakers deem it appropriate. However, we argue that forward guidance about future interest rates could deliver much, though not all, of the accommodation of yield curve control.
Journal Article
How Does a Rise in International Shipping Costs Affect U.S. Inflation?
Trenton Herriford, Elizabeth M. Johnson, Nicholas Sly, and A. Lee Smith find that an increase in ocean shipping costs leads to a modest boost in core inflation after one year.
Working Paper
The Financial Market Effects of Unwinding the Federal Reserve’s Balance Sheet
For the second time in the brief 12-year period between 2008 and 2020, central banks have once again turned to asset purchase programs to combat a global economic downturn. While balance sheet expansions have become familiar, balance sheet normalization has proven more elusive. Nevertheless, an understanding of the consequences of unwinding asset purchases is necessary for well-informed decisions over the deployment of these unconventional policy tools. This paper provides a first analysis of the financial market effects of balance sheet normalization based on the U.S. experience between 2017 ...
Working Paper
House prices, heterogeneous banks and unconventional monetary policy options
This paper develops a nancial mechanism which integrates housing and the real econ- omy through housing-secured debt. In this environment, movements in home prices are ampli ed through both borrowers and banks' balance sheets, leading to a self-reinforcing credit/liquidity crunch. When placed within a traditional business cycle model, this - financial structure quantitatively captures empirical relationships the traditional nancial accelerator mechanism struggles to explain and the qualitative predictions of the model are consistent with dynamic responses from a VAR. The model provides a ...