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Jel Classification:C11 

Working Paper
Indeterminacy and Imperfect Information

We study equilibrium determination in an environment where two kinds of agents have different information sets: The fully informed agents know the structure of the model and observe histories of all exogenous and endogenous variables. The less informed agents observe only a strict subset of the full information set. All types of agents form expectations rationally, but agents with limited information need to solve a dynamic signal extraction problem to gather information about the variables they do not observe. We show that for parameter values that imply a unique equilibrium under full ...
Working Paper , Paper 19-17

Working Paper
The Empirical Implications of the Interest-Rate Lower Bound

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in U.S. ...
Finance and Economics Discussion Series , Paper 2012-83

Working Paper
Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies

This paper estimates the natural rate of interest for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. Our empirical analysis establishes the following four main findings: First, we show that the open economy framework provides a better fit of the data than its closed economy counterpart for the six countries we investigate. Second, we also show that, in all six countries, a Taylor (1993)-type monetary policy rule that tracks the Wicksellian short-term natural rate fits the data better ...
Globalization Institute Working Papers , Paper 359

Working Paper
Bayesian Estimation of Time-Changed Default Intensity Models

We estimate a reduced-form model of credit risk that incorporates stochastic volatility in default intensity via stochastic time-change. Our Bayesian MCMC estimation method overcomes nonlinearity in the measurement equation and state-dependent volatility in the state equation. We implement on firm-level time-series of CDS spreads, and find strong in-sample evidence of stochastic volatility in this market. Relative to the widely-used CIR model for the default intensity, we find that stochastic time-change offers modest benefit in fitting the cross-section of CDS spreads at each point in time, ...
Finance and Economics Discussion Series , Paper 2015-2

Working Paper
Signaling Effects of Monetary Policy

We develop a dynamic general equilibrium model in which the policy rate signals the central bank?s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters? inflation expectations. This model improves upon existing perfect information models in explaining why, in the data, inflation expectations respond with delays to monetary impulses and remain disanchored for years. In the 1970s, U.S. monetary policy is found to signal persistent inflationary ...
Working Paper Series , Paper WP-2016-14

Working Paper
Can Forecast Errors Predict Financial Crises? Exploring the Properties of a New Multivariate Credit Gap

Yes, they can. I propose a new method to detect credit booms and busts from multivariate systems -- monetary Bayesian vector autoregressions. When observed credit is systematically higher than credit forecasts justified by real economic activity variables, a positive credit gap emerges. The methodology is tested for 31 advanced and emerging market economies. The resulting credit gaps fit historical evidence well and detect turning points earlier, outperforming the credit-to-GDP gaps in signaling financial crises, especially at longer horizons. The results survive in real time and can shed ...
Finance and Economics Discussion Series , Paper 2020-045

Working Paper
Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation

We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the ...
Working Paper , Paper 14-2

Working Paper
Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle

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
Financial Frictions, Financial Shocks, and Aggregate Volatility

I revisit the Great Inflation and the Great Moderation for nominal and real variables. I document an immoderation in corporate balance sheet variables so that the Great Moderation is best described as a period of divergent patterns in volatilities for real, nominal and financial variables. A model with time-varying financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework is estimated. The paper shows that (i) while the Great Inflation was driven by bad luck, the Great Moderation was mostly due to better institutions; (ii) ...
Finance and Economics Discussion Series , Paper 2014-84

Working Paper
Assessing International Commonality in Macroeconomic Uncertainty and Its Effects

This paper uses a large vector autoregression (VAR) to measure international macroeconomic uncertainty and its effects on major economies, using two datasets, one with GDP growth rates for 19 industrialized countries and the other with a larger set of macroeconomic indicators for the U.S., euro area, and U.K. Using basic factor model diagnostics, we first provide evidence of significant commonality in international macroeconomic volatility, with one common factor accounting for strong comovement across economies and variables. We then turn to measuring uncertainty and its effects with a large ...
Working Papers (Old Series) , Paper 1803

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