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Working Paper
A Macroeconomic Model of Central Bank Digital Currency
Paul, Pascal; Ulate, Mauricio; Wu, Jing Cynthia (2025-06-25)
We develop a quantitative New Keynesian DSGE model with monopolistic banks to study the macroeconomic effects of introducing a central bank digital currency (CBDC). Households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed, while bank profitability and lending decline. We assess this trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal rate that can be approximated by a simple rule of thumb: the maximum between 0% and ...
Working Paper Series , Paper 2024-11

Working Paper
Optimal Monetary and Macroprudential Policies: Gains and Pitfalls in a Model of Financial Intermediation
Kiley, Michael T.; Sim, Jae W. (2015-09-04)
We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument ...
Finance and Economics Discussion Series , Paper 2015-78

Working Paper
Monetary Policy and The Medium-Run Natural Rate
Curdia, Vasco (2025-10-16)
The natural rate of interest is an elusive concept in theory and practice. However, it is essential for central banks’ calibration of the policy rate. Model consistent measures are often too extreme to be used in practice. On the other hand, empirical measures lack the full backing of theory to make them proper benchmarks. This paper proposes a medium-run measure of the natural rate that averages out some excessive fluctuations, while retaining enough connection to economic theory to make it optimal under certain circumstances. The discussion also provides a framework on how to evaluate and ...
Working Paper Series , Paper 2025-24

Report
Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)
Del Negro, Marco; Schorfheide, Frank (2008-03-01)
This paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions.
Staff Reports , Paper 320

Working Paper
Oil Price Fluctuations, US Banks, and Macroprudential Policy
Gelain, Paolo; Lorusso, Marco (2024-10-23)
Using US micro-level data on banks, we document a negative effect of high oil prices on US banks' balance sheets, more negative for highly leveraged banks. We set and estimate a general equilibrium model with banking and oil sectors that rationalizes those findings through the financial accelerator mechanism. This mechanism amplifies the effect of oil price shocks, making them non-negligible drivers of the dynamics of US banks' intermediation activity and of the US real economy. Macroprudential policy, in the form of a countercyclical capital buffer, can meaningfully address oil price ...
Working Papers , Paper 22-33R

Working Paper
The Effects of Foreign Shocks when Interest Rates are at Zero
Bodenstein, Martin; Guerrieri, Luca; Erceg, Christopher J. (2009)
In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed-economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country. The home economy is more vulnerable to adverse foreign shocks if ...
International Finance Discussion Papers , Paper 983

Working Paper
Selecting Primal Innovations in DSGE models
Ferroni, Filippo; León-Ledesma, Miguel A.; Grassi, Stefano (2017-08-01)
DSGE models are typically estimated assuming the existence of certain primal shocks that drive macroeconomic fluctuations. We analyze the consequences of estimating shocks that are "non-existent" and propose a method to select the primal shocks driving macroeconomic uncertainty. Forcing these non-existing shocks in estimation produces a downward bias in the estimated internal persistence of the model. We show how these distortions can be reduced by using priors for standard deviations whose support includes zero. The method allows us to accurately select primal shocks and estimate model ...
Working Paper Series , Paper WP-2017-20

Working Paper
Fiscal Stimulus Under Average Inflation Targeting
Liu, Zheng; Miao, Jianjun; Su, Dongling (2023-04-19)
The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multipliers. due to intertemporal substitution. In a zero-lower bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a ...
Working Paper Series , Paper 2022-22

Discussion Paper
A Bird's Eye View of the FRBNY DSGE Model
Sbordone, Argia M.; De Paoli, Bianca; Tambalotti, Andrea (2014-09-23)
Dynamic stochastic general equilibrium (DSGE) models provide a stylized representation of reality. As such, they do not attempt to model all the myriad relationships that characterize economies, focusing instead on the key interactions among critical economic actors. In this post, we discuss which of these interactions are captured by the FRBNY model and describe how we quantify them using macroeconomic data. For more curious readers, this New York Fed working paper provides much greater detail on these and other aspects of the model.
Liberty Street Economics , Paper 20140923

Discussion Paper
Forecasting the Great Recession: DSGE vs. Blue Chip
Del Negro, Marco; Schorfheide, Frank; Herbst, Daniel (2012-04-16)
Dynamic stochastic general equilibrium (DSGE) models have been trashed, bashed, and abused during the Great Recession and after. One of the many reasons for the bashing was the models’ alleged inability to forecast the recession itself. Oddly enough, there’s little evidence on the forecasting performance of DSGE models during this turbulent period. In the paper “DSGE Model-Based Forecasting,” prepared for Elsevier’s Handbook of Economic Forecasting, two of us (Del Negro and Schorfheide), with the help of the third (Herbst), provide some of this evidence. This post shares some of our ...
Liberty Street Economics , Paper 20120416

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