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Report
Business cycle fluctuations and the distribution of consumption
De Giorgi, Giacomo; Gambetti, Luca (2015-03-01)
This paper sheds new light on the interactions between business cycles and the consumption distribution. We use Consumer Expenditure Survey data and a factor model to characterize the cyclical dynamics of the consumption distribution. We first establish that our approach is able to closely match business cycle fluctuations of consumption from the National Account. We then study the responses of the consumption distribution to total factor productivity shocks and economic policy uncertainty shocks. Importantly, we find that the responses of the right tail of the consumption distribution, ...
Staff Reports , Paper 716

Working Paper
Fiscal Stimulus with Learning-By-Doing
dAlessandro, Antonello; Fella, Giulio; Melosi, Leonardo (2018-05-01)
Using a Bayesian SVAR analysis, we document that an increase in government purchases raises private consumption, the real wage and total factor productivity (TFP) while reducing inflation. Each of these facts is hard to reconcile with both neoclassical and New-Keynesian models. We extend a standard New-Keynesian model to allow for skill accumulation through past work experience, following Chang, Gomes and Schorfheide (2002). An increase in government spending increases hours and induces skill accumulation and higher measured TFP and real wages in subsequent periods. Future marginal costs fall ...
Working Paper Series , Paper WP-2018-9

Working Paper
Optimal Inflation Target with Expectations-Driven Liquidity Traps
Coyle, Philip; Nakata, Taisuke (2019-05-17)
In expectations-driven liquidity traps, a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven liquidity traps to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven liquidity trap lowers the optimal inflation target nontrivially. Our analysis provides a reason to be cautious about the argument that ...
Finance and Economics Discussion Series , Paper 2019-036

Working Paper
The Fiscal Theory of the Price Level in a World of Low Interest Rates
Cui, Wei; Bassetto, Marco (2017-11-16)
A central equation for the fiscal theory of the price level (FTPL) is the government budget constraint (or "government valuation equation"), which equates the real value of government debt to the present value of fiscal surpluses. In the past decade, the governments of most developed economies have paid very low interest rates, and there are many other periods in the past in which this has been the case. In this paper, we revisit the implications of the FTPL in a world where the rate of return on government debt may be below the growth rate of the economy, considering different sources for ...
Working Paper Series , Paper WP-2017-25

Journal Article
On the Mechanics of Fiscal Inflations
Bassetto, Marco; Benzoni, Luca; Hall, Jason (2024-07-12)
The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace’s (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the COVID pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the ...
Quarterly Review , Volume 44 , Issue 2

Report
Liquidity Traps and Monetary Policy: Managing a Credit Crunch: Online Appendix
Nicolini, Juan Pablo; Buera, Francisco J. (2017-02-02)
Staff Report , Paper 541

Working Paper
A Promised Value Approach to Optimal Monetary Policy
Nakata, Taisuke; Hills, Timothy S.; Sunakawa, Takeki (2018-12-03)
This paper characterizes optimal commitment policy in the New Keynesian model using a novel recursive formulation of the central bank's infinite horizon optimization problem. In our recursive formulation motivated by Kydland and Prescott (1980), promised inflation and output gap---as opposed to lagged Lagrange multipliers---act as pseudo-state variables. Using three well known variants of the model---one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates---we show that the proposed formulation sheds new light on the ...
Finance and Economics Discussion Series , Paper 2018-083

Working Paper
Government Debt Limits and Stabilization Policy
Young, Eric R.; Murphy, Daniel (2020-07-31)
We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at ...
Working Papers , Paper 20-23

Working Paper
Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia
Hills, Timothy S.; Nakata, Taisuke (2014-11-20)
The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the ...
Finance and Economics Discussion Series , Paper 2014-107

Working Paper
Fiscal Expansions in the Era of Low Real Interest Rates
Garga, Vaishali (2020-04-01)
Low natural real interest rates limit the power of monetary policy to revive the economy due to the zero lower bound (ZLB) on the nominal interest rate. Fiscal stabilization via higher government debt is frequently recommended as a policy to raise the natural real interest rate. This paper builds a non-Ricardian framework to study the tradeoffs associated with a debt-financed fiscal expansion and show that even in a low real interest rate environment, higher debt doesn’t necessarily raise the real interest rate. The effect of the expansion is non-monotonic: Increasing debt raises the ...
Working Papers , Paper 20-11

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