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Working Paper
All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy
The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in ...
Working Paper
Asset Co-movements: Features and Challenges
This paper documents and characterizes the time-varying structure of U.S. and international asset co-movements. Although some of the time variation could be genuine, the sampling uncertainty and time series properties of the series can distort significantly the underlying signal dynamics. We discuss examples that illustrate the pitfalls from drawing conclusions from local trends of asset prices. On a more constructive side, we find that the U.S. main asset classes and major international stock indices share a factor that is closely related to the business cycle. At even lower frequency, the ...
Discussion Paper
Is the Recent Inflationary Spike a Global Phenomenon?
In the aftermath of the COVID-19 pandemic, inflation rose almost simultaneously in most economies around the world. After peaking in mid-2022, inflation then went into decline—a fall that was just as universal as the initial rise. In this post, we explore the interrelation of inflation dynamics across OECD countries by constructing a measure of the persistence of global inflation. We then study the extent to which the persistence of global inflation reflects broad-based swings, as opposed to idiosyncratic country-level movements. Our main finding is that the spike and subsequent moderation ...
Working Paper
Time-varying Persistence of House Price Growth: The Role of Expectations and Credit Supply
High persistence is a prominent feature of price movements in U.S. housing markets, i.e., house prices grow faster this period if they grew faster last period. This paper provides two additional new insights to the literature on U.S. house price movements. First, there exists a significant time variation in the persistence of house price growth, both at the national and city level. Second, there is considerable heterogeneity in the time-varying persistence across different regions, particularly in areas that were historically less persistent, such as the capital-poor regions in the Midwest ...
Report
A Measure of Trend Wage Inflation
We extend time-series models that have so far been used to study price inflation (Stock and Watson [2016a]) and apply them to a micro-level dataset containing worker-level information on hourly wages. We construct a measure of aggregate nominal wage growth that (i) filters out noise and very transitory movements, (ii) quantifies the importance of idiosyncratic factors for aggregate wage dynamics, and (iii) strongly co-moves with labor market tightness, unlike existing indicators of wage inflation. We show that our measure is a reliable real-time indicator of wage pressures and a good ...
Working Paper
Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models
We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence ? policy inertia or persistent policy shocks ? is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary ...
Working Paper
Excess Persistence in Employment of Disadvantaged Workers
We examine persistence in employment-to-population ratios in excess of that implied by persistence in aggregate labor market conditions, among less-educated individuals using state-level data for the United States. Dynamic panel regressions and local projections indicate a moderate degree of excess persistence, which dissipates within three years. We find no significant asymmetry between the excess persistence of high vs. low employment rates. The cumulative effect of excess persistence in the business cycle surrounding the 2001 recession was mildly positive, while the effect in the cycle ...
Discussion Paper
A Turning Point in Wage Growth?
The surge in wage growth experienced by the U.S. economy over the past two years is showing some tentative signs of moderation. In this post, we take a closer look at the underlying data by estimating a model designed to isolate the persistent component—or trend—of wage growth. Our central finding is that this trend may have peaked in early 2022, having experienced an earlier rise and subsequent moderation that were broad-based across sectors. We also find that wage growth seems to be moderating more slowly than the trend in services inflation.
Report
The Drivers of Inflation Dynamics during the Pandemic: (Early) Evidence from Disaggregated Consumption Data
What explains inflation dynamics during the COVID-19 pandemic? This brief focuses on the relative roles of demand and supply factors. Prices and quantities of consumed goods and services are positively correlated following demand changes and negatively correlated in response to supply disturbances. Employing disaggregated indexes from personal consumption expenditures data, this brief documents a positive relationship between prices and quantities during the early stages of the pandemic, followed by a negative relationship in the later period. Thus, while the short deflation episode in March ...
Working Paper
Expectations as a source of macroeconomic persistence: an exploration of firms' and households' expectation formation
While there is little question that expectations lie at the heart of much economic decision-making, and therefore at the heart of models of the macroeconomy that hope to reflect such decision-making, how such expectations are formed is an open research question. In earlier work, Fuhrer (2015) showed that empirical estimates of a standard dynamic stochastic general equilibrium (DSGE) model preferred inertia in expectations over price indexation or habit formation as a mechanism to explain the persistence of aggregate time series for output, inflation, and interest rates. A question left open ...