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Working Paper
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit
Gagnon, Etienne; Vilan, Diego; Trevino, James; Chung, Hess T.; Nakata, Taisuke; Paustian, Matthias; Zheng, Wei; Schlusche, Bernd (2019-02-01)
We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in ...
Finance and Economics Discussion Series , Paper 2019-003

Working Paper
A Hitchhiker’s Guide to Empirical Macro Models
Canova, Fabio; Ferroni, Filippo (2021-09-04)
This paper describes a package which uses MATLAB functions and routines to estimate VARs, local projections and other models with classical or Bayesian methods. The toolbox allows a researcher to conduct inference under various prior assumptions on the parameters, to produce point and density forecasts, to measure spillovers and to trace out the causal effect of shocks using a number of identification schemes. The toolbox is equipped to handle missing observations, mixed frequencies and time series with large cross-section information (e.g. panels of VAR and FAVAR). It also contains a number ...
Working Paper Series , Paper WP-2021-15

Working Paper
Sticky Wages, Monetary Policy and Fiscal Policy Multipliers
Dupor, Bill; Li, Rong; Li, Jingchao (2017-03-27)
This paper demonstrates how adding nominal wage rigidity to a standard sticky price model can create a mechanism by which increases in government spending cause increases in consumption. The increase in output arising from government purchases puts upward pressure on the price level. At a fixed short-run nominal wage, this bids down the real wage, which leads producers to increase labor demand. Increased labor demand allows households to both finance the tax bill associated with the government spending as well as increase their own consumption. Our approach does not rely upon existing ...
Working Papers , Paper 2017-7

Working Paper
How to Starve the Beast: Fiscal Policy Rules
Martin, Fernando M. (2023-08-08)
Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of expenditure, revenue, budget balance and debt rules when governments are discretionary and prone to overspending. The optimal prescription is either an expenditure ceiling or a combination of revenue and primary deficit ceilings. Most of the benefits can still be reaped with constraints looser than optimal or escape clauses during adverse times. When imposed on their own, revenue ceilings are only mildly ...
Working Papers , Paper 2019-026

Report
A model of the federal funds market: yesterday, today, and tomorrow
Lester, Benjamin; Afonso, Gara; Armenter, Roc (2018-02-01)
The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before ...
Staff Reports , Paper 840

Working Paper
Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge
Martínez García, Enrique; Duncan, Roberto; Miller, Luke (2026-06)
In August 2020, the Federal Reserve adopted Flexible Average Inflation Targeting (FAIT), permitting inflation to temporarily exceed the 2% target. Using synthetic control methods, we estimate that FAIT raised headline CPI inflation by 1 percentage point and core CPI by 0.5 percentage points, relative to a no-FAIT-adoption counterfactual, with short-lived effects concentrated during the 2021 inflation surge. Short-term inflation expectations increased by 0.8 percentage points, while long-term expectations remained well anchored. Real economic effects were statistically insignificant. The ...
Working Papers , Paper 2511

Discussion Paper
Does the Equity Term Structure Respond to Monetary Policy Shocks?
Dyer, Henry; Jankauskas, Tomas (2026-08-12)
A long-standing body of research, inspired by Bernanke and Kuttner (2005), has documented the effects of Fed interest rate surprises on stock markets. While stock markets provide valuable information about the investor risk premium and dividend growth expectations, researchers have only recently developed more comprehensive tools to estimate the term structure of equity risk premia and dividend growth expectations across a broad range of maturities. In this post, we investigate the impact of monetary policy surprises (or shocks) on short- and long-term estimates of risk premia and growth ...
Liberty Street Economics , Paper 20260812

Working Paper
Monetary Policy and the Great COVID-19 Price Level Shock
Andolfatto, David; Martin, Fernando M. (2025-07-28)
We employ a small-scale dynamic general equilibrium model to analyze the surge in inflation following the COVID-19 pandemic. A calibrated version of the model is used to assess U.S. monetary and fiscal policy over the 2020–2024 period and to estimate the economic and welfare consequences of alternative policy scenarios. The analysis suggests that the large fiscal transfers of 2020–2021 were broadly welfare-improving, albeit larger than necessary. Given the fiscal stance in place, optimal monetary policy would not have generated a materially different price level dynamic. While monetary ...
Working Papers , Paper 2025-004

Report
Estimating HANK for Central Banks
Acharya, Sushant; Chen, William; Del Negro, Marco; Dogra, Keshav; Gleich, Aidan; Goyal, Shlok; Matlin, Ethan; Lee, Donggyu; Sarfati, Reca; Sengupta, Sikata (2023-08-01)
We provide a toolkit for efficient online estimation of heterogeneous agent (HA) New Keynesian (NK) models based on Sequential Monte Carlo methods. We use this toolkit to compare the out-of-sample forecasting accuracy of a prominent HANK model, Bayer et al. (2022), to that of the representative agent (RA) NK model of Smets and Wouters (2007, SW). We find that HANK’s accuracy for real activity variables is notably inferior to that of SW. The results for consumption in particular are disappointing since the main difference between RANK and HANK is the replacement of the RA Euler equation with ...
Staff Reports , Paper 1071

Working Paper
Relative Price Shocks and Inflation
Ruge-Mucia, Francisco J.; Wolman, Alexander L. (2022-05)
Inflation is determined by interaction between real factors and monetary policy. Among the most important real factors are shocks to the supply and demand for different components of the consumption basket. We use an estimated multi-sector New Keynesian model to decompose the behavior of U.S. inflation into contributions from sectoral (or "relative price") shocks, monetary policy shocks, and aggregate real shocks. The model is estimated by maximum likelihood with U.S. data for the post-1994 period in which inflation and the monetary policy regime appeared to be stable. In addition to ...
Working Paper , Paper 22-07

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