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Working Paper
When does the cost channel pose a challenge to inflation targeting central banks?
Smith, Andrew Lee (2015-06-01)
In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in ...
Research Working Paper , Paper RWP 15-6

Working Paper
Optimal Monetary Policy for the Masses
Bullard, James B.; DiCecio, Riccardo (2019-03-22)
We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. There is an important credit market friction because households participating in the credit market use non-state contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity. The heterogeneity is substantial enough that we can approach measured Gini coefficients for income, financial ...
Working Papers , Paper 2019-9

Working Paper
Liquidity Traps in a Monetary Union
Kollmann, Robert (2020-08-25)
The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest ...
Globalization Institute Working Papers , Paper 397

Journal Article
How Did the Fed Funds Market Change When Excess Reserves Were Abundant?
Nosal, Ed; McGowan, John (2020-03-01)
Prior to the 2007-2008 financial crisis, excess reserves in the U.S. banking system were scarce. After the financial crisis and up until early 2018, excess reserves were abundant. In this article, the authors document, analyze, and explain the differences in the performance of the federal funds market under the two different excess reserves frameworks.
Economic Policy Review , Volume 26 , Issue 1 , Pages 15

Working Paper
No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations
Andrade, Philippe; Coibion, Olivier; Gautier, Erwan; Gorodnichenko, Yuriy (2020-08-01)
We study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions using a survey of French manufacturing firms. We document an important new stylized fact. In response to industry-level shocks that have no aggregate effects, firms’ aggregate expectations respond persistently. This is consistent with “island” models in which firms use the local prices they observe to make inferences about broader aggregate conditions. We then assess the extent to which these patterns are related to observable characteristics of firms and the industries in ...
Working Papers , Paper 20-17

Report
Reconciling Bagehot with the Fed's response to September 11
Martin, Antoine (2005-08-01)
The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics, a central bank should provide liquidity at a very high rate of interest. However, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero. This latter recommendation is broadly consistent with the Federal Reserve?s behavior in the days following September 11, 2001. This paper shows that Bagehot?s recommendation can be reconciled with the Fed?s policy if one recognizes that Bagehot had in mind a commodity money regime in which ...
Staff Reports , Paper 217

Working Paper
Two-sided Market, R&D and Payments System Evolution
Li, Bin Grace; McAndrews, James J.; Wang, Zhu (2019-02-08)
It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time. We address these puzzles by studying payments system evolution with a dynamic model in a two-sided market setting. We calibrate the model to the U.S. payment card data, and conduct welfare and policy analysis. Our analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary ...
Working Paper , Paper 19-3

Working Paper
A Risk-based Theory of Exchange Rate Stabilization
Hassan, Tarek A.; Mertens, Thomas M.; Zhang, Tony (2020-05-01)
We develop a novel, risk-based theory of the effects of exchange rate stabilization. In our model, the choice of exchange rate regime allows policymakers to make their currency, and by extension, the firms in their country, a safer investment for international investors. Policies that induce a country's currency to appreciate when the marginal utility of international investors is high lower the required rate of return on the country's currency and increase the world-market value of domestic firms. Applying this logic to exchange rate stabilizations, we find a small economy stabilizing its ...
Working Paper Series , Paper 2016-15

Working Paper
Unconventional monetary policy and the behavior of shorts
Planchon, Jade; McInish, Thomas H.; Neely, Christopher J. (2017-10-27)
In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after a set of these unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, ...
Working Papers , Paper 2017-31

Working Paper
Credit Search and Credit Cycles
Wen, Yi; Dong, Feng; Wang, Pengfei (2015-08-01)
The supply and demand of credit are not always well aligned and matched, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate. We develop a search-based theory of credit allocations to explain the cyclical fluctuations in both bank reserves and the interest spread. We show that search frictions in the credit market can not only naturally explain the countercyclical bank reserves and interest spread, but also generate endogenous business cycles driven primarily by the cyclical utilization rate of credit ...
Working Papers , Paper 2015-23

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