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Working Paper
Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation
What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables ...
Journal Article
A Growth-Augmented Phillips Curve
Empirical studies find that the link between inflation and economic slack has weakened in recent decades, a development that could hamper monetary policymakers as they aim to achieve their inflation objective. We show that while the role of economic slack has diminished, economic growth has become a significant driver of inflation dynamics, indicating that the link between inflation and economic activity remains but the relevant gauge of activity has changed. The new evidence suggests that the COVID-19-related recession could induce substantial disinflationary pressure.
Journal Article
The Lasting Damage from the Financial Crisis to U.S. Productivity
Michael Redmond and Willem Van Zandweghe find that tight credit conditions during the 2007?09 financial crisis dampened productivity, leaving it on a lower trajectory. The article is summarized in The Macro Bulletin.
Journal Article
Monetary policy and firm entry and exit
Yoonsoo Lee and Willem Van Zandweghe find unusually accommodative monetary policy reduces the reallocation of capital and workers from exiting firms to new ones, potentially slowing productivity growth.
Journal Article
Why Has Durable Goods Spending Been So Strong during the COVID-19 Pandemic?
Consumers increased their purchases of durable goods notably during the COVID-19 pandemic. The pandemic may have lifted the demand for durable goods directly, by shifting consumer preferences away from services toward a variety of durable goods. It may also have stimulated spending on durable goods indirectly, by prompting a strong fiscal policy response that raised disposable income. We estimate the historical relationship between durable goods spending and income and find that income gains in 2020 accounted for about half of the increase in durable goods spending, indicating that the direct ...
Journal Article
The Changing Cyclicality of Labor Force Participation
The labor force participation rate has become more sensitive to the business cycle.
Working Paper
Labor market search and interest rate policy
We investigate implications of search and matching frictions in the labor market for in ation targeting interest rate policy in terms of equilibrium stability. When the interest rate is set in response to past or present in ation, determinacy of equilibrium is ensured similarly to comparable previous studies with frictionless labor markets. In stark contrast to these studies, indeterminacy is very likely if the interest rate is adjusted in response solely to expected future in ation. This is due to a vacancy channel of monetary policy that stems from the labor market frictions and renders in ...
Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature with canonical New Keynesian models has established that the Fed's policy change from a passive to an active response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a staggered price model with trend inflation using a Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. {{p}} The model empirically outperforms a canonical New Keynesian model and demonstrates an active response to inflation even in the Great Inflation era, during which the U.S. ...
Working Paper
A Theory of Intrinsic Inflation Persistence
We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show ...
Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature has established that the Fed? change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature?s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature?s view. Our estimated model shows an active policy response to inflation even during the Great ...