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Report
Monetary policy frameworks and the effective lower bound on interest rates
This paper applies a standard New Keynesian model to analyze the effects of monetary policy 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 become 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 mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for ...
Working Paper
Conservatism and Liquidity Traps
Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB ...
Journal Article
Evaluating Monetary Policy with Inflation Bands and Horizons
Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.
Working Paper
The Value of Constraints on Discretionary Government Policy
This paper investigates how institutional constraints discipline the behavior of discretionary governments subject to an expenditure bias. The focus is on constraints implemented in actual economies: monetary policy targets, limits on the deficit and debt ceilings. For a variety of aggregate shocks considered, the best policy is to impose a minimum primary surplus of about half a percent of output. Most welfare gains from constraining government behavior during normal times, which to a large extent is sufficient to discipline policy in adverse times. Monetary policy targets are not generally ...
Challenges to the Fed’s New Monetary Policy Strategy
This post discusses some potential challenges the FOMC may face in pursuing a flexible average inflation targeting approach.
Working Paper
Monetary Policy and Durable Goods
We analyze monetary policy in a New Keynesian model with durable and nondurable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known ?divine coincidence.? In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation ...
Speech
Navigating Unpredictable Terrain
Remarks at the Central Bank of Chile Centennial Conference, Santiago, Chile.
Speech
Monetary policy strategies for a low-neutral-interest-rate world: remarks at the 80th Plenary Meeting of the Group of Thirty, Federal Reserve Bank of New York, New York City
Remarks at the 80th Plenary Meeting of the Group of Thirty, Federal Reserve Bank of New York, New York City.
Working Paper
The Rise in Home Currency Issuance
Using a large sample of private international bond issues, we document a substantial decline in the share of international bonds denominated in major reserve currencies over the last two decades, and an increase in bonds denominated in issuers? home currencies. These secular trends appear to have accelerated notably after the global financial crisis. Observed increases in home currency foreign bond issuance was larger in countries with stable inflation and lower government debt, and in emerging markets that adopted explicit inflation targeting policies. We then present a model that ...
Key Elements of the Fed’s New Monetary Policy Strategy
In August, the Fed announced completion of its framework review that resulted in a new monetary policy strategy. How does the new strategy differ from the previous one?