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Jel Classification:D83 

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Central bank transparency and nonlinear learning dynamics

Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive ...
Staff Reports , Paper 342

Report
Heterogeneous inflation expectations and learning

Using the panel component of the Michigan Survey of Consumers, we estimate a learning model of inflation expectations, allowing for heterogeneous use of both private information and lifetime inflation experience. ?Life-experience inflation? has a significant impact on individual expectations, but only for one-year-ahead inflation. Public information is substantially more relevant for longer-horizon expectations. Even controlling for life-experience inflation and public information, idiosyncratic information explains a nontrivial proportion of the inflation forecasts of agents. We find that ...
Staff Reports , Paper 536

Report
Fundamental disagreement

We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time-varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two ...
Staff Reports , Paper 655

Report
Information heterogeneity and intended college enrollment

Despite a robust college premium, college attendance rates in the United States have remained stagnant and exhibit a substantial socioeconomic gradient. We focus on information gaps? specifically, incomplete information about college benefits and costs?as a potential explanation for these patterns. In a nationally representative survey of U.S. household heads, we show that perceptions of college costs and benefits are severely and systematically biased: 74 percent of our respondents underestimate the true benefits of college (average earnings of a college graduate relative to a non-college ...
Staff Reports , Paper 685

Report
Learning the fiscal theory of the price level: some consequences of debt management policy

This paper examines how the scale and composition of public debt can affect economies that implement a combination of ?passive? monetary policy and ?active? fiscal policy. This policy configuration is argued to be of both historical and contemporary interest in the cases of the U.S. and Japanese economies. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability under a range of policies specified as simple rules. However, interest rate pegs in combination with active fiscal policies almost always ensure macroeconomic stability. This ...
Staff Reports , Paper 515

Report
Fiscal foundations of inflation: imperfect knowledge

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require ...
Staff Reports , Paper 649

Report
The over-the-counter theory of the fed funds market: a primer

We present a dynamic over-the-counter model of the fed funds market, and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the Discount Window lending rate, and the interest rate on bank reserves.
Staff Reports , Paper 660

Report
Anxiety and pro-cyclical risk taking with Bayesian agents

We provide a model that can explain empirically relevant variations in confidence and risk taking by combining horizon-dependent risk aversion (?anxiety?) and selective memory in a Bayesian intrapersonal game. In the time series, overconfidence is more prevalent when actual risk levels are high, while underconfidence occurs when risks are low. In the cross section, more anxious agents are more prone to biased confidence and their beliefs fluctuate more. This systematic variation in confidence levels can lead to objectively excessive risk taking by ?insiders? with the potential to amplify ...
Staff Reports , Paper 711

Report
Intended college attendance: evidence from an experiment on college returns and costs

Despite a robust college premium, college attendance rates in the United States have remained stagnant and exhibit a substantial socioeconomic gradient. We focus on information gaps?specifically, incomplete information about college benefits and costs?as a potential explanation for these patterns. For this purpose, we conduct an information experiment about college returns and costs embedded within a representative survey of U.S. household heads. We show that, at the baseline, perceptions of college costs and benefits are severely and systematically biased: 75 percent of our respondents ...
Staff Reports , Paper 739

Report
Population aging, migration spillovers, and the decline in interstate migration

We investigate the role of the aging of the U.S. population in the decline in interstate migration since the mid-1980s. Using an instrumental variables strategy on cross-state data, we show that an aging workforce causes the migration rates of all age groups in a state to drop. This demonstrates that the effect of aging on migration includes indirect effects that go beyond the direct effect of raising the workforce share of groups with lower migration rates. We then develop an island model in which firms can hire workers either locally or from other locations, and show that an aging ...
Staff Reports , Paper 699

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