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Working Paper
Taylor Rule Estimation by OLS
Carvalho, Carlos; Nechio, Fernanda; Tristao, Tiago (2021-09-01)
Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, that are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term – hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, however, IV estimation poses challenges, as the validity of potential instruments depends on various unobserved features of ...
Working Paper Series , Paper 2018-11

Working Paper
The Skewness of the Price Change Distribution : A New Touchstone for Sticky Price Models
Luo, Shaowen; Villar Vallenas, Daniel (2017-03-10)
We present a new way of empirically evaluating various sticky price models used to assess the degree of monetary non-neutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model both rise. However, CPI price data from the late 1970's onwards shows that skewness does not fall with inflation, while dispersion does. We develop a random menu cost model that, with a menu cost distribution that has a strong Calvo feature, can match the empirical patterns found. The model therefore exhibits much more monetary non-neutrality ...
Finance and Economics Discussion Series , Paper 2017-028

Working Paper
Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance
Christensen, Jens H. E.; Hetland, Simon Thinggaard (2023-08-15)
This article presents empirical evidence of a supply-induced transmission channel to longterm interest rates caused by a halt to government debt issuance. This is conceptually equivalent to a central bank operated asset purchase program, commonly known as quantitative easing (QE). However, as it involves neither asset purchases nor associated creation of central bank reserves, we refer to it as passive QE. For evidence, we analyze the response of Danish government bond risk premia to a temporary halt in government debt issuance announced by the Danish National Bank. The data suggest that ...
Working Paper Series , Paper 2023-24

Working Paper
Inferring the Shadow Rate from Real Activity
Garcia, Benjamin; Skaperdas, Arsenios (2017)
We estimate a shadow rate consistent with the paths of time series capturing real activity. This allows us to quantify the real effects of unconventional monetary policy in terms of equivalent short-term interest rate movements. We find that large-scale asset purchases and forward guidance had significant real effects equivalent of up to a four percent reduction in the federal funds rate.
Finance and Economics Discussion Series , Paper 2017-106

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

Working Paper
Macroeconomic Effects of Banking Sector Losses across Structural Models
Covas, Francisco; Kiley, Michael T.; Driscoll, John C.; Jahan-Parvar, Mohammad; Iacoviello, Matteo; Sim, Jae W.; Guerrieri, Luca; Queraltó, Albert (2015-06-03)
The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions.
Finance and Economics Discussion Series , Paper 2015-44

Working Paper
Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement
Christensen, Jens H. E.; Lopez, Jose A.; Mussche, Paul (2019-03-22)
Insurance companies and pension funds have liabilities far into the future and typically well beyond the longest maturity bonds trading in fixed-income markets. Such long-lived liabilities still need to be discounted, and yield curve extrapolations based on the information in observed yields can be used. We use dynamic Nelson-Siegel (DNS) yield curve models for extrapolating risk-free yield curves for Switzerland, Canada, France, and the U.S. We find slight biases in extrapolated long bond yields of a few basis points. In addition, the DNS model allows the generation of useful financial risk ...
Working Paper Series , Paper 2018-9

Working Paper
Reconsidering the Fed’s Forecasting Advantage
Owyang, Michael T.; McCracken, Michael W.; Guisinger, Amy Y. (2022-01)
Previous studies show the Fed has a forecast advantage over the private sector, either because it devotes more resources to forecasting or because it has an informational advantage in knowing the path of future monetary policy. We evaluate the Fed’s forecast advantage to determine how much of it results from the Fed’s knowledge of the conditioning path. We develop two tests—an instrumental variable encompassing test and a path-dependent encompassing test—to equalize the Fed’s information set with the private sector’s. We find that, generally, the Fed does not encompass the private ...
Working Papers , Paper 2022-001

Journal Article
Microfoundations of Money: Why They Matter
Waller, Christopher J. (2015)
What is the value of having microfoundations for monetary exchange in a macro model? In this article, the author attempts to answer this question by listing what he considers the major accomplishments of the field. He argues that the evidence overwhelmingly shows that microfoundations matter for many questions of first-order importance in macroeconomics.
Review , Volume 97 , Issue 4 , Pages 289-301

Working Paper
A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States
Andreasen, Martin M.; Meldrum, Andrew C. (2018-08-13)
We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models ' ability to match conditional expectations away from the ZLB deteriorates because the time-series{{p}}dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional ...
Finance and Economics Discussion Series , Paper 2018-056

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