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Working Paper
Considerations Regarding Inflation Ranges
Siemer, Michael; Doyle, Brian M.; Hebden, James; Chung, Hess T. (2020-08-27)
We consider three ways that a monetary policy framework may employ a range for inflation outcomes: (1) ranges that acknowledge uncertainty about inflation outcomes (uncertainty ranges), (2) ranges that define the scope for intentional deviations of inflation from its target (operational ranges), and (3) ranges over which monetary policy will not react to inflation deviations (indifference ranges). After defining these three ranges, we highlight a number of costs and benefits associated with each. Our discussion of the indifference range is accompanied by simulations from the FRB/US model, ...
Finance and Economics Discussion Series , Paper 2020-075

Working Paper
Labor Supply Shocks, Labor Force Entry, and Monetary Policy
Kurozumi, Takushi; Van Zandweghe, Willem (2022-05-24)
Should monetary policy offset the effects of labor supply shocks on inflation and the output gap? Canonical New Keynesian models answer yes. Motivated by weak labor force participation during the pandemic, we reexamine the question by introducing labor force entry and exit in an otherwise canonical model with sticky prices and wages. The entry decision generates an employment channel of monetary policy, and a labor supply shock to the value of nonparticipation in the labor market induces a policy trade-off between stabilization of the employment gap and wage growth. For an adverse labor ...
Working Papers , Paper 22-17

Working Paper
Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation
Georgiadis, Georgios; Schumann, Ben (2019-09-04)
Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy coordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, ...
Globalization Institute Working Papers , Paper 368

Journal Article
Did Communicating a Numerical Inflation Target Anchor U.S. Inflation Expectations?
Bundick, Brent; Smith, Andrew Lee (2018-01-17)
Macro Bulletin

Report
Comparing forecast-based and backward-looking Taylor rules: a "global" analysis
Eusepi, Stefano (2005-01-01)
This paper examines the performance of forecast-based nonlinear Taylor rules in a class of simple microfunded models. The paper shows that even if the policy rule leads to a locally determinate (and stable) inflation target, there exist other learnable "global" equilibria such as cycles and sunspots. Moreover, under learning dynamics, the economy can fall into a liquidity trap. By contrast, more backward-looking and "active" Taylor rules guarantee that the unique learnable equilibrium is the inflation target. This result is robust to different specifications of the role of money, price ...
Staff Reports , Paper 198

Report
Optimal Monetary Policy According to HANK
Dogra, Keshav; Challe, Edouard; Acharya, Sushant (2020-02-01)
We study optimal monetary policy in a heterogeneous agent new Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time ...
Staff Reports , Paper 916

Working Paper
Optimal Monetary Policy in an Open Emerging Market Economy
Iyer, Tara (2016-06-20)
The majority of households across emerging market economies are excluded from the financial markets and cannot smooth consumption. I analyze the implications of this for optimal monetary policy and the corresponding choice of domestic versus external nominal anchor in a small open economy framework with nominal rigidities, aggregate uncertainty and financial exclusion. I find that, if set optimally, monetary policy smooths the consumption of financially excluded agents by stabilizing their income. Even though Consumer Price Index (CPI) inflation targeting approximates optimal monetary policy ...
Working Paper Series , Paper WP-2016-6

Working Paper
Managing Macroeconomic Fluctuations with Flexible Exchange Rate Targeting
Mihov, Ilian; Heipertz, Jonas; Santacreu, Ana Maria (2020-12-07)
We show that a monetary policy rule that uses the exchange rate to stabilize the economy outperforms a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the path of the nominal exchange rate and interest rate under each rule, and (ii) time variation in the risk premium, which leads to deviations from uncovered interest parity. These differences are larger in very open economies, more exposed to foreign shocks, and in which domestic and foreign goods are highly substitutable.
Working Papers , Paper 2017-028

Working Paper
Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle
Nicolo, Giovanni (2020-05-05)
I estimate a medium-scale New-Keynesian model and relax the conventional assumption that the central bank adopted an active monetary policy by pursuing inflation and output stability over the entire post-war period. Even after accounting for a rich structure, I find that monetary policy was passive prior to the Volcker disinflation. Sunspot shocks did not represent quantitatively relevant sources of volatility. By contrast, such passive interest rate policy accommodated fundamental productivity and cost shocks that de-anchored inflation expectations, propagated via self-fulfilling inflation ...
Finance and Economics Discussion Series , Paper 2020-035

Working Paper
The Macroeconomic Risks of Undesirably Low Inflation
Arias, Jonas E.; Erceg, Christopher J.; Trabandt, Mathias (2016-04-12)
This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
International Finance Discussion Papers , Paper 1162

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