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Working Paper
Central bank credibility and the persistence of inflation and inflation expectations
Davis, J. Scott (2012)
This paper introduces a model where agents are unsure about the central bank's inflation target. They believe that the central bank's inflation target could lie between two extremes, and their beliefs vary depending on the central bank's stock of credibility. They form the expectations used in price and wage setting using this perceived inflation target, and they use past observations of inflation to update their beliefs about the credibility of the central bank. Thus a series of high inflation observations can lead them to believe (incorrectly) that the central bank has adopted a high ...
Globalization Institute Working Papers , Paper 117

Working Paper
Anchored Inflation Expectations and the Flatter Phillips Curve
Jorgensen, Peter; Lansing, Kevin J. (2019-11-06)
Conventional versions of the Phillips curve cannot account for inflation dynamics during and after the U.S. Great Recession, leading many to conclude that the Phillips curve relationship has weakened or even disappeared. We show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to inflation, then agents? inflation expectations should have become more ?anchored? over the Great Moderation period. An estimated New Keynesian Phillips curve that accounts for the increased anchoring of expected inflation exhibits a stable slope coefficient over the ...
Working Paper Series , Paper 2019-27

Working Paper
Mechanics of Linear Quadratic Gaussian Rational Inattention Tracking Problems
Fulton, Chad (2017-11-03)
This paper presents a general framework for constructing and solving the multivariate static linear quadratic Gaussian (LQG) rational inattention tracking problem. We interpret the nature of the solution and the implied action of the agent, and we construct representations that formalize how the agent processes data. We apply this infrastructure to the rational inattention price-setting problem, confirming the result that a conditional response to economics shocks is possible, but casting doubt on a common assumption made in the literature. We show that multiple equilibria and a social cost ...
Finance and Economics Discussion Series , Paper 2017-109

Working Paper
Monetary Policy, Housing Rents and Inflation Dynamics
Dias, Daniel A.; Duarte, Joao B. (2019-05-23)
International Finance Discussion Papers , Paper 1248

Working Paper
Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information
Crucini, Mario J.; Tsuruga, Takayuki; Shintani, Mototsugu (2008)
Volatile and persistent real exchange rates are observed not only in aggregate series but also on the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully ...
Globalization Institute Working Papers , Paper 07

Working Paper
Inequality in the Welfare Costs of Disinflation
Pugsley, Benjamin; Rubinton, Hannah (2019-12-04)
We use an incomplete markets economy to quantify the distribution of welfare gains and losses of the US "Volcker" disinflation. In the long run households prefer low inflation, but disinflation requires a transition period and a redistribution from net nominal borrowers to net nominal savers. Even with perfectly flexible prices, welfare costs may be significant for households with nominal liabilities. When calibrated to match the micro and macro moments of the early 1980s high inflation environment, almost half of all borrowers (14 percent of all households) would prefer to avoid the ...
Working Papers , Paper 2020-021

Working Paper
Monetary Policy and Economic Performance since the Financial Crisis
Caldara, Dario; Gagnon, Etienne; Martínez-García, Enrique; Neely, Christopher J. (2020-08-27)
We review macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.
Finance and Economics Discussion Series , Paper 2020-065

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

Report
The effect of question wording on reported expectations and perceptions of inflation
Armantier, Olivier; Downs, Julie S.; Topa, Giorgio; Van der Klaauw, Wilbert; Fischhoff, Baruch; Bruine de Bruin, Wändi (2010)
Public expectations and perceptions of inflation may affect economic decisions, and have subsequent effects on actual inflation. The Michigan Survey of Consumers uses questions about "prices in general" to measure expected and perceived inflation. Median responses track official measure of inflation, showing some tendency toward overestimation and considerable disagreement between respondents. Possibly, responses reflect how much respondents thought of salient personal experiences with specific prices when being asked about "prices in general." Here, we randomly assigned respondents to ...
Staff Reports , Paper 443

Discussion Paper
Assessing monetary accommodation: a simple empirical model of monetary policy and its implications for unemployment and inflation
Armen, Alan ; Koenig, Evan F. (2015-12)
This note suggests that household wealth growth and a long-forward interest rate can be used to construct a simple and convenient reference standard for assessing the current stance of monetary policy. It shows that the difference between the federal funds rate and this reference interest rate is a powerful predictor of the unemployment rate and inflation, producing real-time forecasts that are competitive with consensus-based forecasts from surveys of forecasting professionals. Moreover, one can understand past FOMC policy actions as efforts to adjust the stance of policy, so measured, in ...
Staff Papers , Issue Dec

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