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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 ...
Journal Article
Why Are Americans Saving So Much of Their Income?
For much of 2020, Americans have saved a greater share of their income than ever before. This increase in savings appears to be predominantly driven by precautionary motives. Therefore, consumers may be reluctant to draw down these savings in the future to support spending.
Working Paper
Reconciling VAR-based Forecasts with Survey Forecasts
This paper proposes a novel Bayesian approach to jointly model realized data and survey forecasts of the same variable in a vector autoregression (VAR). In particular, our method imposes a prior distribution on the consistency between the forecast implied by the VAR and the survey forecast for the same variable. When the prior is placed on unconditional forecasts from the VAR, the prior shapes the posterior of the reduced-form VAR coefficients. When the prior is placed on conditional forecasts (specifically, impulse responses), the prior shapes the posterior of the structural VAR ...
Working Paper
The dynamic effects of forward guidance shocks
We examine the macroeconomic effcts of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical ...
Working Paper
Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations
In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations ...
Working Paper
Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications
High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical ...
Journal Article
Bond Premiums and the Natural Real Rate of Interest
Journal Article
Do Changes in Reserve Balances Still Influence the Federal Funds Rate?
Over the past decade, the implementaton of U.S. monetary policy has changed significantly. Rather than adjusting the quantity of reserves in the banking system, policymakers now primarily use the interest rate paid on reserve balances, the IOR rate, to bring the federal funds rate within the target range. However, the recent rise in the federal funds rate relative to the IOR rate has raised questions about the primary drivers of the spread between the federal funds rate and the IOR rate in the Federal Reserve?s new operating framework. {{p}} A. Lee Smith examines the role declining reserve ...
Journal Article
Has forward guidance been effective?
A. Lee Smith and Thealexa Becker compare forward guidance announcements with changes in the effective federal funds rate and find the two policy measures have had similar macroeconomic effects.