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Working Paper
Raising the Inflation Target: How Much Extra Room Does It Really Give?
Schoenle, Raphael; L'Huillier, Jean-Paul (2020-06-16)
Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking ...
Working Papers , Paper 20-16

Working Paper
Bad Jobs and Low Inflation
Melosi, Leonardo; Faccini, Renato (2020-03-02)
We study a model in which firms compete to retain and attract workers searching on the job. A drop in the rate of on-the-job search makes such wage competition less likely, reducing expected labor costs and lowering inflation. This model explains why inflation has remained subdued over the last decade, which is a conundrum for general equilibrium models and Phillips curves. Key to this success is the observed slowdown in the recovery of the employment-to-employment transition rate in the last five years, which is interpreted by the model as a decline in the share of employed workers searching ...
Working Paper Series , Paper WP 2020-09

Working Paper
The Hidden Heterogeneity of Inflation Expectations and its Implications
Pfajfar, Damjan; Dräger, Lena; Lamla, Michael J. (2020-07-10)
Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of ...
Finance and Economics Discussion Series , Paper 2020-054

Working Paper
Monitoring Money for Price Stability
Nicolini, Juan Pablo; Hevia, Constantino (2017-11-14)
In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the ...
Working Papers , Paper 744

Working Paper
Hitting the Elusive Inflation Target
Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias (2019-08-30)
Since the 2001 recession, average core inflation has been below the Federal Reserve?s 2% target. This deflationary bias is a predictable consequence of a low nominal interest rates environment in which the central bank follows a symmetric strategy to stabilize inflation. The deflationary bias increases if macroeconomic uncertainty rises or the natural real interest rate falls. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias and allows inflation to converge to the central bank?s target. We show that adopting this ...
Working Paper Series , Paper WP-2019-7

Report
The Monetary and Fiscal History of Argentina, 1960-2017
Nicolini, Juan Pablo; Buera, Francisco J. (2019-02-01)
In this chapter, we review the monetary and fiscal history of Argentina for the period 1960?2017, a time during which the country suffered several balance of payments crises, three periods of hyperinflation, two defaults on government debt, and three banking crises. All told, between 1969 and 1991, after several monetary reforms, thirteen zeros had been removed from its currency. We argue that all these events are the symptom of a recurrent problem: Argentina?s unsuccessful attempts to tame the fiscal deficit. An implication of our analysis is that the future economic evolution of Argentina ...
Staff Report , Paper 580

Working Paper
Inflation and the Gig Economy: Have the Rise of Online Retailing and Self-Employment Disrupted the Phillips Curve?
Duca, John V. (2018-11-16)
During the recovery from the Great Recession, inflation did not reach the central bank?s 2 percent objective as quickly as many models had predicted. This coincided with increases in online shopping, which arguably made retail markets more contestable and damped retail inflation. This hypothesis is tested using data on the online share of retail sales, which are incorporated into an econometric model. Results imply that the rise of online retail has flattened the Phillips Curve, reducing the sensitivity of inflation to unemployment rate changes. Improvement in fit from just including the ...
Working Papers , Paper 1814

Working Paper
Inflation Levels and (In)Attention
Bracha, Anat; Tang, Jenny (2022-01-01)
Inflation expectations are key determinants of economic activity and are central to the current policy debate about whether inflation expectations will remain anchored in the face of recent pandemic-related increases in inflation. This paper explores evidence of inattention by constructing two different measures of consumers’ inattention and documents greater inattention when inflation is low. This suggests that there is indeed a risk of an acceleration in the increases in inflation expectations if actual inflation remains high.
Working Papers , Paper 22-4

Working Paper
Who Killed the Phillips Curve? A Murder Mystery
Ratner, David; Sim, Jae W. (2022-05-20)
Is the Phillips curve dead? If so, who killed it? Conventional wisdom has it that the sound monetary policy since the 1980s not only conquered the Great Inflation, but also buried the Phillips curve itself. This paper provides an alternative explanation: labor market policies that have eroded worker bargaining power might have been the source of the demise of the Phillips curve. We develop what we call the "Kaleckian Phillips curve", the slope of which is determined by the bargaining power of trade unions. We show that a nearly 90 percent reduction in inflation volatility is possible even ...
Finance and Economics Discussion Series , Paper 2022-028

Working Paper
Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation
Kurozumi, Takushi; Hirose, Yasuo; Van Zandweghe, Willem (2015-12-01)
What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables ...
Research Working Paper , Paper RWP 15-17

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