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Discussion Paper
Do You Know How Your Treasury Trades Are Cleared and Settled?
Mithal, Radhika; Keane, Frank M.; Fleming, Michael J.; Copeland, Adam (2018-09-12)
The Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secondary market trades of U.S. Treasury securities. The paper describes in detail the many ways Treasury trades are cleared and settled? information that may not be readily available to all market participants?and identifies potential risk and resiliency issues. The work is designed to facilitate discussion as to whether current practices have room for improvement. In this post, we summarize the current state of clearing and settlement for secondary market Treasury ...
Liberty Street Economics , Paper 20180912

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

Working Paper
International Credit Markets and Global Business Cycles
Pintus, Patrick A.; Wen, Yi; Xing, Xiaochuan (2018-05-14)
This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from ...
Working Papers , Paper 2018-9

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
Escaping the Great Recession
Melosi, Leonardo; Bianchi, Francesco (2014-08-01)
While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers? behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short ...
Working Paper Series , Paper WP-2014-17

Working Paper
Uncertainty and Hyperinflation: European Inflation Dynamics after World War I
Mitchener, Kris James; Lopez, Jose A. (2018-05-09)
Fiscal deficits, elevated debt-to-GDP ratios, and high inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that economic policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from frequent uncertainty shocks ? and correspondingly high levels of uncertainty ? caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border ...
Working Paper Series , Paper 2018-6

Working Paper
Redistribution and the Monetary–Fiscal Policy Mix
Yang, Choongryul; Bhattarai, Saroj; Lee, Jae Won (2021-03-01)
We show that the effectiveness of redistribution policy in stimulating the economy and improving welfare is directly tied to how much inflation it generates, which in turn hinges on monetary-fiscal adjustments that ultimately finance the transfers. We compare two distinct types of monetary-fiscal adjustments: In the monetary regime, the government eventually raises taxes to finance transfers, while in the fiscal regime, inflation rises, effectively imposing inflation taxes on public debt holders. We show analytically in a simple model how the fiscal regime generates larger and more persistent ...
Finance and Economics Discussion Series , Paper 2021-013

Report
The advantage of flexible targeting rules
Ferrero, Andrea (2008-07-01)
This paper investigates the consequences of debt stabilization for inflation targeting. If the monetary authority perfectly stabilizes inflation while the fiscal authority holds constant the real value of debt at maturity, the equilibrium dynamics might be indeterminate. However, determinacy can be restored by committing to targeting rules for either monetary or fiscal policy that include a concern for stabilization of the output gap. In solving the indeterminacy problem, flexible inflation targeting appears to be more robust than flexible debt targeting to alternative parameter ...
Staff Reports , Paper 339

Working Paper
A Monetary-Fiscal Theory of Sudden Inflations and Currency Crises
Miller, David S. (2021-08-24)
Treating nominal government bonds like other bonds leads to a new theory of sudden inflations and currency crises. Holmstrom (2015) and Gorton (2017) describe bonds as having costly-to-investigate opaque backing that consumers believe is sufficient for repayment. Government bonds' nominal return is their face value, their real return is determined by the government's surplus. In normal times, consumers are confident of repayment but ignorant of the true surpluses that will fund that repayment. When consumers' belief in real repayment wavers, they investigate surpluses. If consumers learn ...
Finance and Economics Discussion Series , Paper 2021-057

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

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