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Working Paper
Thinking Outside the Box: Do SPF Respondents Have Anchored Inflation Expectations?
Despite the stability of the median 10-year inflation expectations in the Survey of Professional Forecasters (SPF) near 2 percent, we show that not a single SPF respondent?s expectations have been anchored at the target since the Federal Open Market Committee?s (FOMC) enactment of an inflation target in January 2012, or even since 2015. However, we find significant evidence for ?delayed anchoring,? or a move toward being anchored, particularly after the federal funds rate lifted off in December 2015.
Working Paper
Raising an Inflation Target : The Japanese Experience with Abenomics
This paper draws from Japan?s recent monetary experiment to examine the effects of an increase in the inflation target during a liquidity trap. We review Japanese data and examine through a VAR model how macroeconomic variables respond to an identified inflation target shock. We apply these findings to calibrate the effect of a shock to the inflation target in a new-Keynesian DSGE model of the Japanese economy. We argue that imperfect observability of the inflation target and a separate exchange rate shock are needed to successfully account for the behavior of nominal and real variables in ...
Working Paper
On Monetary Policy, Model Uncertainty, and Credibility
This paper studies the design of optimal time-consistent monetary policy in an economy where the planner and a representative household are faced with model uncertainty: While they are able to construct and agree on a reference model (probability distribution) governing the evolution of the exogenous state of the economy, a representative household has fragile beliefs and is averse to model uncertainty. In such environments, management of households' expectations becomes an active channel of optimal policymaking per se. A central banker who respects the fact that private sector models are ...
Working Paper
Credible Forward Guidance
We analyze credible forward guidance policies in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates by solving a series of optimal sustainable policy problems indexed by the duration of reputational loss. Lower-for-longer policies---while effective in stimulating the economy at the ELB---are potentially time-inconsistent, as the associated overheating of the economy in the aftermath of a crisis is undesirable ex post. However, if reneging on a lower-for-longer promise leads to a loss of reputation and prevents the central bank from effectively using ...
Working Paper
Assessing Central Bank Commitment to Inflation Targeting: Evidence from Financial Market Expectations in India
We propose a novel framework to gauge the credibility of central banks’ commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India’s adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation ...
Working Paper
Three Scenarios for Interest Rates in the Transition to Normalcy
This article develops time-series models to represent three alternative, potential monetary policy regimes as monetary policy returns to normal. The first regime is a return to the high and volatile inflation rate of the 1970s. The second regime, the one that most Federal Reserve officials and business economists expect, is a return to the credible low inflation policy that characterized the U.S. economy from 1983 to 2007, a period that has come to be known as the Great Moderation. The third regime is one in which policymakers decide to keep policy interest rates at or near zero for the ...