Assessing monetary accommodation: a simple empirical model of monetary policy and its implications for unemployment and inflation
This note suggests that household wealth growth and a long-forward interest rate can be used to construct a simple and convenient reference standard for assessing the current stance of monetary policy. It shows that the difference between the federal funds rate and this reference interest rate is a powerful predictor of the unemployment rate and inflation, producing real-time forecasts that are competitive with consensus-based forecasts from surveys of forecasting professionals. Moreover, one can understand past FOMC policy actions as efforts to adjust the stance of policy, so measured, in ...
Exchange rate policies
Modern macroeconomic theory teaches us new lessons about exchange rates: Currency depreciations or appreciations that change the relative competitiveness of producers in different countries are undesirable from a global perspective if they lead to relative prices that do not reflect the true relative costs of production. From this standpoint, "external balance" does not mean that trade balances should be zero, but rather that global resources are allocated efficiently. The implications of this insight for the role of the exchange rate in monetary policy are explored here. Some of the ...
Excluding items from personal consumption expenditures inflation
Core inflation measures constructed by excluding particularly volatile items from the price index have a long history. The most common such measures are indexes excluding the prices of food and energy items. This paper attempts to shed some statistical light on the impact of excluding certain items from the personal consumption expenditures (PCE) price index. In particular, I am interested in the trade-off between reducing shortrun volatility (relative to the volatility of the headline index) and possibly distorting the measurement of inflation over longer horizons. Some of the questions this ...
Globalization, aggregate productivity, and inflation
This paper investigates the effects of globalization on aggregate productivity, output growth, and inflation. I present a simple two-country, two-good, flexible exchange rate model using Fisher Ideal aggregators to examine changes in the mapping from microeconomic to macroeconomic productivity growth as nations globalize. Advances in industry-specific labor productivity are shown to have potentially a much greater pass-through to aggregate productivity, output, and prices the more open nations are to trade. Globalization raises both the level and growth rate of aggregate productivity by ...
How bad was it? The costs and consequences of the 2007–09 financial crisis
The 2007?09 financial crisis was associated with a huge loss of economic output and financial wealth, psychological consequences and skill atrophy from extended unemployment, an increase in government intervention, and other significant costs. Assuming the financial crisis is to blame for these associated ills, an estimate of its cost is needed to weigh against the cost of policies intended to prevent similar episodes. We conservatively estimate that 40 to 90 percent of one year's output ($6 trillion to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S. household) was foregone ...
The global slack hypothesis
We illustrate the analytical content of the global slack hypothesis in the context of a variant of the widely used New Open-Economy Macro model of Clarida, Gal, and Gertler (2002) under the assumptions of both producer currency pricing and local currency pricing. The model predicts that the Phillips curve for domestic CPI inflation will be flatter under most plausible parameterizations, the more important international trade is to the domestic economy. The model also predicts that foreign output gaps will matter for inflation dynamics, along with the domestic output gap. We also show that the ...
Exchange rate pass-through into U.K. import prices: evidence from disaggregated data
In this paper we estimate the rate of exchange rate pass-through (ERPT) into U.K. import prices using disaggregated data at the SITC-2 and SITC-3 digit levels. We show that the ERPT varies at the disaggregate level. Because of this heterogeneity at the disaggregate level, the estimate of the ERPT using aggregate data is found substantially upward-biased in our U.K. data. The upward bias exaggerates the impact of exchange rate movements on the competitiveness of imported goods relative to domestically produced goods. Further, we investigate the source of the heterogeneity of the ERPT at the ...
Immigrants’ employment outcomes over the business cycle
Immigrants have figured prominently in U.S. economic growth for decades, but the recent recession hit them hard. Immigrants? labor market outcomes began deteriorating even before the recession was officially under way, largely as a result of the housing bust. An analysis of employment and unemployment rates over the past fifteen years shows that immigrants? labor market outcomes are more cyclical than those of natives. The greater cyclicality of immigrants? employment and unemployment is concentrated among less-educated immigrants, but college-educated immigrants nonetheless have ...
Estimating the output gap in real time
I propose a novel method of estimating the potential level of U.S. GDP in real time. The proposed wage-based measure of economic potential remains virtually unchanged when new data are released. The distance between current and potential output ? the output gap ? satisfies Okun?s law and outperforms many other measures of slack in forecasting inflation. Thus, I provide a robust statistical tool useful for understanding current economic conditions and guiding policymaking.
Measuring core inflation: notes from a 2007 Dallas Fed conference
In May 2007, the Federal Reserve Bank of Dallas hosted a conference, organized with the Federal Reserve Bank of Cleveland, titled "Price Measurement for Monetary Policy." The conference broadly focused on two issues - the measurement of core inflation and the measurement of inflation expectations. This paper summarizes the conference papers on core inflation.