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Working Paper
Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts
Teranishi, Yuki; Fujiwara, Ippei (2015-04-01)
Do financial frictions call for policy cooperation? This paper investigates the implications of simple financial frictions, monopolistic banking together with staggered loan contracts, for monetary policy in open economies in the linear quadratic (LQ) framework. Welfare analysis shows that policy cooperation improves social welfare in the presence of such financial frictions. There also exist long-run gains from cooperation in addition to these by jointly stabilizing inefficient fluctuations over the business cycle, that are usually found in models with price rigidities. The Ramsey optimal ...
Globalization Institute Working Papers , Paper 237

Working Paper
Pegging the exchange rate to gain monetary policy credibility
Davis, J. Scott; Fujiwara, Ippei (2015-01-01)
Central banks that lack credibility often tie their exchange rate to that of a more credible partner in order to ?import? credibility. We show in a small open economy model that a central bank that displays ?limited credibility? can deliver significant improvements to a social welfare function that contains no role for exchange rate stabilization by maximizing an objective function that places weight on exchange rate stabilization, and thus the central bank with limited credibility will peg their currency to that of a more credible partner. As the central bank?s credibility improves it will ...
Globalization Institute Working Papers , Paper 224

Working Paper
Sudden Stops and Optimal Foreign Exchange Intervention
Davis, J. Scott; Devereux, Michael B.; Yu, Changhua (2020-11-10)
This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through ...
Globalization Institute Working Papers , Paper 405

Working Paper
Anchored or Not: How Much Information Does 21st Century Data Contain on Inflation Dynamics?
Kiley, Michael T. (2022-03-30)
Inflation was low and stable in the United States during the first two decades of the 21st century and broke out of its stable range in 2021. Experience in the early 21st century differed from that of the second half of the 20th century, when inflation showed persistent movements including the "Great Inflation" of the 1970s. This analysis examines the extent to which the experience from 2000-2019 should lead a Bayesian decisionmaker to update their assessment of inflation dynamics. Given a prior for inflation dynamics consistent with 1960-1999 data, a Bayesian decisionmaker would not ...
Finance and Economics Discussion Series , Paper 2022-016

Working Paper
Monetary Policy Uncertainty
Husted, Lucas F.; Rogers, John H.; Sun, Bo (2017-10)
We construct new measures of uncertainty about Federal Reserve policy actions and their consequences - monetary policy uncertainty (MPU) indexes. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. The effects are of comparable magnitude to those of conventional monetary policy shocks. We evaluate the usefulness of our MPU indexes, and examine the influence of Fed communication. Our analysis suggests that policy rate normalization that is accompanied by reduced uncertainty can help ...
International Finance Discussion Papers , Paper 1215

Working Paper
A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity
Wong, Russell; Rocheteau, Guillaume; Weill, Pierre-Olivier (2017-04-20)
We construct a continuous-time, New-Monetarist economy with general preferences that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of ...
Working Paper , Paper 17-6

Working Paper
Private news and monetary policy forward guidance or (the expected virtue of ignorance)
Waki, Yuichiro; Fujiwara, Ippei (2015-04-01)
How should monetary policy be designed when the central bank has private information about future economic conditions? When private news about shocks to future fundamentals is added to an otherwise standard new Keynesian model, social welfare deteriorates by the central bank?s reaction to or revelation of such news. There exists an expected virtue of ignorance, and secrecy constitutes optimal policy. This result holds when news are about cost-push shocks, or about shocks to the monetary policy objective, or about shocks to the natural rate of interest, and even when the zero lower bound of ...
Globalization Institute Working Papers , Paper 238

Working Paper
Do Monetary Policy Announcements Shift Household Expectations?
Lewis, Daniel J.; Makridis, Christos; Mertens, Karel (2020-01-17)
We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the Federal Funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings ...
Working Papers , Paper 1906

Working Paper
What Can the Data Tell Us About the Equilibrium Real Interest Rate?
Kiley, Michael T. (2015-08-26)
The equilibrium real interest rate (r*) is the short-term real interest rate that, in the long run, is consistent with aggregate production at potential and stable inflation. Estimation of r* faces considerable econometric and empirical challenges. On the econometric front, classical inference confronts the "pile-up" problem. Empirically, the co-movement of output, inflation, unemployment, and real interest rates is too weak to yield precise estimates of r*. These challenges are addressed by applying Bayesian methods and examining the role of several "demand shifters", including asset ...
Finance and Economics Discussion Series , Paper 2015-77

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