The relative performance of alternative Taylor rule specifications
We look at how well several alternative Taylor rule specifications describe Federal Reserve policy decisions in real time, using the newly developed Giacomini and Rossi (2007) test for non-nested model selection in the presence of (possible) parameter instability. Further, we isolate those Taylor rule features that are most important for achieving relatively strong real-time performance. A second-order partial adjustment version of the Koenig (2004a) model performs consistently better than alternative specifications. Key features of this rule are the partial adjustment of the federal funds rate toward an equilibrium rate that depends on the unemployment rate and forward-looking inflation measures.
AUTHORS: Nikolsko-Rzhevskyy, Alex; Koenig, Evan F.; Fernandez, Adriana
The difficult art of eliciting long-run inflation expectations from government bond prices
Central banks are always concerned with keeping long-run inflation expectations well anchored at some implicit or explicit low target inflation rate. To that end, they are constantly on the lookout for indicators that can gauge those expectations accurately. One such indicator frequently reported in the specialized financial press and by central banks around the world is constructed with the forward rates technique, which exploits price differentials between government bonds of various maturities. This article examines the theory behind those indicators and assesses the extent to which they can be trusted in practice.
AUTHORS: Zarazaga, Carlos E.
The international product cycle and globalization of production
This paper develops a growth model aimed at understanding the potential effects of globalization of production on rate of innovation, distribution of skilled labor income between the North and South, and welfare of skilled workers in both regions. We adopt a dynamic general equilibrium product-cycle model, assuming that the North specializes in innovation and the South specializes in imitation. Globalization of production resulting from trade liberalization and imitation of the North's technology by the South increases the rate of innovation. In the initial stage of globalization of production, deeper globalization unambiguously improves the welfare of skilled labor in the North, though welfare of Southern skilled labor may still increase. In the later stage, deeper globalization of production unambiguously improves the welfare of skilled labor in the South, though welfare of Northern skilled labor may still improve.
AUTHORS: Lai, Edwin L.-C.
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.
AUTHORS: Dolmas, James; Wynne, Mark A.
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 response to unemployment and inflation gaps. There is little evidence of inertia in this version of the Taylor rule, in contrast to Taylor-rule specifications that assume a fixed reference real federal funds rate.
AUTHORS: Armen, Alan ; Koenig, Evan F.
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.
AUTHORS: Cheremukhin, Anton A.
Openness and inflation
This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country's openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship?that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper?seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation's inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.
AUTHORS: Kersting, Erasmus K.; Wynne, Mark A.
Analyzing the export flow from Texas to Mexico
From 1997 to 2008, Texas shipped 40 percent of its manufacturing exports to Mexico. This puts Texas-Mexico among the largest state-country trading relationships. But this share has been declining recently. A gravity equation cannot account for either of these facts, even though Texas and Mexico share a border. This positive contiguity effect is not unique in state export data. I study the features of the Texas-Mexico relationship to try to account for the size of the export flow and the recent decline in share. Data limitations prevent a full accounting, but the most likely feature is the changing source of maquiladora inputs from the United States to Asia
AUTHORS: Cassey, Andrew J.
Inflation, slack, and Fed credibility
It is generally agreed that slack has some impact on inflation. There is much less agreement on what form the relationship takes and whether it is stable enough to reliably help predict inflation. This analysis focuses on the Great Moderation period. We find that slack (as measured by the unemployment rate) and changes in slack are negatively correlated with changes in inflation and also deviations of inflation from long-forward inflation expectations.> ; These relationships could have been exploited to produce forecasts of trimmed mean PCE inflation more accurate than rule-of-thumb forecasts. Forecasts of trimmed mean PCE inflation also serve well as predictions of GDP inflation and headline PCE inflation. Our analysis suggests that currently high levels of slack should hold inflation below two percent over 2012.
AUTHORS: Atkinson, Tyler; Koenig, Evan F.
The globalization of U.S. business investment
This paper documents some key facts about foreign direct investment flows by U.S. businesses overseas and foreign businesses in the United States. We show how the pattern of flows has evolved, examine the sources and destination of these flows, document associated employment and productivity gains, and show how investment-related sales compare with traditional exports. While the United States is a net debtor to the rest of the world, direct investment overseas by U.S. businesses exceeds direct investment in the U.S. by foreign businesses. Furthermore, U.S. businesses seem to earn more on their foreign investments than foreign firms earn on their U.S. investments. The globalization of business investment is a long-standing phenomenon, but it has accelerated in recent years and become a source of concern for some, as it is intimately related to the debate on offshore outsourcing. Yet contrary to what some think, the bulk of U.S. investment overseas is in other high-income countries. And foreign investment in the U.S. has been an important source of employment growth in recent years.
AUTHORS: Kersting, Erasmus K.; Wynne, Mark A.