Search Results
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
Should the ECB Adjust Its Strategy in the Face of a Lower r*?
We address the question in this paper’s title using an estimated New Keynesian DSGE model of the euro area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight-tenths the size of the drop in the real natural rate of interest is ...
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.
Report
Tying down the anchor: monetary policy rules and the lower bound on interest rates
This paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation ...
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
Welfare-enhancing inflation and liquidity premia
We investigate what principles govern the evolution and maturity structure of the national debt when nominal government securities constitute an important form of exchange media. Even in the absence of government funding risk, we find a rationale for issuing nominal debt in different maturities, purposely mispricing long-term debt, and growing the nominal debt to support a strictly positive inflation target. The policy of discounting long-term debt and supporting a strictly positive inflation target provides superior risk-sharing arrangements for clienteles characterized by different degrees ...
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
An economy that switches between high and low growth regimes creates incentives for the monetary authority to change its rule. As lower growth tends to produce lower real interest rates, the monetary authority has an incentive to increase the inflation target and increase the degree of inertia in setting rates in an attempt to keep the nominal rate away from the zero lower bound. An optimizing monetary authority therefore responds to permanently lower growth by slightly increasing both the inflation target and inertia; focusing solely on the inflation target ignores a key margin of ...