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Working Paper
The Risk-Adjusted Monetary Policy Rule
Schmidt, Sebastian; Nakata, Taisuke (2016-07)
Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation---the rate to which inflation will eventually converge---which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted ...
Finance and Economics Discussion Series , Paper 2016-061

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

Working Paper
Forecasting with Shadow-Rate VARs
Clark, Todd E.; Marcellino, Massimiliano; Mertens, Elmar; Carriero, Andrea (2021-03-29)
Interest rate data are an important element of macroeconomic forecasting. Projections of future interest rates are not only an important product themselves, but also typically matter for forecasting other macroeconomic and financial variables. A popular class of forecasting models is linear vector autoregressions (VARs) that include shorter- and longer-term interest rates. However, in a number of economies, at least shorter-term interest rates have now been stuck for years at or near their effective lower bound (ELB), with longer-term rates drifting toward the constraint as well. In such an ...
Working Papers , Paper 21-09

Speech
Important choices for the Federal Reserve in the years ahead: remarks at Lehman College, Bronx, New York
Dudley, William (2018-04-18)
Remarks at Lehman College, Bronx, New York.
Speech

Working Paper
How Robust Are Makeup Strategies to Key Alternative Assumptions?
Hebden, James; Topa, Giorgio; Winkler, Fabian; Tang, Jenny; Herbst, Edward (2020-08-27)
We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations. We survey empirical evidence on the behavior of shorter-run and long-run inflation expectations. Using simulations from the FRB/US macroeconomic model, we find that makeup strategies can moderately offset the real effects of adverse economic shocks, even when much of the public is uninformed about the monetary strategy. We also discuss the robustness of makeup ...
Finance and Economics Discussion Series , Paper 2020-069

Working Paper
Monetary Policy Strategies to Foster Price Stability and a Strong Labor Market
Kiley, Michael T. (2024-05-28)
I assess monetary policy strategies to foster price stability and labor market strength. The assessment incorporates a range of challenges, including uncertainty regarding the equilibrium real interest rate, mismeasurement of economic potential, and balancing the costs and benefits associated with employment shortfalls and labor market strength. I find that the ELB remains a significant constraint, hindering achievement of the inflation objective and worsening employment shortfalls. Symmetric policy reaction functions mitigate the most adverse effects of employment shortfalls by contributing ...
Finance and Economics Discussion Series , Paper 2024-033

Working Paper
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit
Gagnon, Etienne; Vilan, Diego; Trevino, James; Chung, Hess T.; Nakata, Taisuke; Paustian, Matthias; Zheng, Wei; Schlusche, Bernd (2019-02-01)
We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in ...
Finance and Economics Discussion Series , Paper 2019-003

Working Paper
Effective Lower Bound Risk
Schmidt, Sebastian; Nakata, Taisuke; Hills, Timothy S. (2019-11-04)
Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 50 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more ...
Finance and Economics Discussion Series , Paper 2019-077

Working Paper
Equilibrium Yield Curves and the Interest Rate Lower Bound
Nakata, Taisuke; Tanaka, Hiroatsu (2016-10)
We study the term structure of default-free interest rates in a sticky-price model with an occasionally binding effective lower bound (ELB) constraint on interest rates and recursive preferences. The ELB constraint induces state-dependency in the dynamics of term premiums by affecting macroeconomic uncertainty and interest-rate sensitivity to economic activities. In a model calibrated to match key features of the aggregate economy and term structure dynamics in the U.S. above and at the ELB, we find that the ELB constraint typically lowers the absolute size of term premiums at the ELB and ...
Finance and Economics Discussion Series , Paper 2016-085

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