Search Results
Speech
An Economic Outlook at the Philadelphia Club: a speech at the Bond Club of Philadelphia, CFA Society of Philadelphia, and Philadelphia Council for Business Economics, May 23, 2016
President Patrick T. Harker presents his economic outlook at an event sponsored by the Bond Club of Philadelphia, the CFA Society of Philadelphia, and the Philadelphia Council for Business Economics. He also offers his views on monetary policy.
Working Paper
Optimal monetary policy regime switches
Given regime switches in the economy?s growth rate, optimal monetary policy rules may respond by switching policy parameters. These optimized parameters differ across regimes and from the optimal choice under fixed regimes, particularly in the inflation target and interest rate inertia. Optimal switching rules produce welfare gains relative to constant rules, with switches in the implicit real interest rate used for policy and the degree of interest rate inertia producing the largest gains. However, gains from switching rules decrease if the monetary authority trades-off the probability of ...
Report
The macroeconomics of trend inflation
Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed ...
Working Paper
The Inflation Target and the Equilibrium Real Rate
Many economists have proposed raising the inflation target to reduce the probability of hitting the zero lower bound (ZLB). It is both a common assumption and a feature of standard models that raising the inflation target does not impact the equilibrium real rate. I demonstrate that in the New Keynesian model, once heterogeneity is introduced, raising the inflation target causes the equilibrium real rate to fall. This implies that raising the inflation target will increase thenominal interest rate by less than expected and thus will be less effective in reducing the probability of hitting the ...
Working Paper
The Optimal Inflation Rate with Discount Factor Heterogeneity
This paper shows that deviations from long-run price stability are optimal in the presence of price stickiness whenever profit and utility flows are discounted at a different rate. In that case, a monetary authority acting under commitment will choose a path for the inflation rate that ends with a non-zero value. Such a property is relevant in a wide range of macroeconomic environments. I first illustrate this by studying optimal monetary policy in a New Keynesian model with a perpetual youth structure. In this setting, profit flows are discounted more heavily than utility flows and the ...
Working Paper
The Optimal Inflation Target and the Natural Rate of Interest
We study how changes in the steady-state real interest rate affect the optimal inflation target in a New Keynesian DSGE model with trend inflation and a lower bound on the nominal interest rate. In this setup, a lower steady-state real interest rate increases the probability of hitting the lower bound. That effect can be counteracted by an increase in the inflation target, but the resulting higher steady-state inflation has a welfare cost in and of itself. We use an estimated DSGE model to quantify that tradeoff and determine the implied optimal inflation target, conditional on the monetary ...
Working Paper
Households' Preferences Over Inflation and Monetary Policy Tradeoffs
We document novel facts about US household preferences over inflation and monetary policy tradeoffs. Many households were attentive to news about monetary policy and to interest rates in 2023. The median household perceives the Federal Reserve's inflation objective to be 3 percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on ...
Journal Article
Despite High Inflation, Longer-Term Inflation Expectations Remain Well Anchored
The Federal Reserve’s long-run 2 percent inflation target is intended to prevent periods of high inflation from becoming embedded in longer-term inflation expectations. However, inflation has remained above the Fed’s target for over three years, increasing the risk that longer-term inflation expectations could become unanchored. Building on our previous research, we study recent market reactions to inflation news and find that longer-term inflation expectations appear to remain well anchored.
Working Paper
Households' Preferences Over Inflation and Monetary Policy Tradeoffs
We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and ...