Search Results
Working Paper
The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model
What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency dependent, and inflation is very persistent. We embed this empirically successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation ...
Working Paper
Estimating Macroeconomic News and Surprise Shocks
The importance of understanding the economic effects of TFP news and surprise shocks is widely recognized in the literature. This paper examines the ability of the state-of-the-art VAR approach in Kurmann and Sims (2021) to identify responses to TFP news shocks and possibly surprise shocks in theory and practice. When applied to data generated from conventional New Keynesian DSGE models with shock processes that match key TFP moments, this estimator tends to be strongly biased, both in the presence of TFP measurement error and in its absence. This bias worsens in realistically small samples, ...
Working Paper
Post-COVID Inflation Dynamics: Higher for Longer
In the December 2022 Summary of Economic Projections (SEP), the median projection for four-quarter core PCE inflation in the fourth quarter of 2025 is 2.1 percent. This same SEP has unemployment rising by nine-tenths, to 4.6 percent, by the end of 2023. We assess the plausibility of this projection using a specific nonlinear model that embeds an empirically successful nonlinear Phillips curve specification into a structural model, identifying it via an underutilized data-dependent method. We model core PCE inflation using three components that align with those noted by Chair Powell in his ...
Working Paper
Understanding the Estimation of Oil Demand and Oil Supply Elasticities
This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models. I not only summarize the state of the literature, but also draw attention to a number of econometric problems that have been overlooked in this literature. Once these problems are recognized, seemingly conflicting conclusions in the recent literature can be resolved. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the ...
Working Paper
Refining the Workhorse Oil Market Model
The Kilian and Murphy (2014) structural vector autoregressive model has become the workhorse model for the analysis of oil markets. I explore various refinements and extensions of this model, including the effects of (1) correcting an error in the measure of global real economic activity, (2) explicitly incorporating narrative sign restrictions into the estimation, (3) relaxing the upper bound on the impact price elasticity of oil supply, (4) evaluating the implied posterior distribution of the structural models, and (5) extending the sample. I demonstrate that the substantive conclusions of ...
Working Paper
Post-COVID Inflation Dynamics: Higher for Longer
We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE – core goods, housing, and core services ex-housing – and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1 percent inflation; however, conditional ...
Working Paper
IDENTIFICATION THROUGH HETEROGENEITY
We analyze set identification in Bayesian vector autoregressions (VARs). Because set identification can be challenging, we propose to include micro data on heterogeneous entities to sharpen inference. First, we provide conditions when imposing a simple ranking of impulse-responses sharpens inference in bivariate and trivariate VARs. Importantly; we show that this set reduction also applies to variables not subject to ranking restrictions. Second, we develop two types of inference to address recent criticism: (1) an efficient fully Bayesian algorithm based on an agnostic prior that directly ...
Working Paper
Facts and Fiction in Oil Market Modeling
A series of recent articles has called into question the validity of VAR models of the global market for crude oil. These studies seek to replace existing oil market models by structural VAR models of their own based on different data, different identifying assumptions, and a different econometric approach. Their main aim has been to revise the consensus in the literature that oil demand shocks are a more important determinant of oil price fluctuations than oil supply shocks. Substantial progress has been made in recent years in sorting out the pros and cons of the underlying econometric ...
Working Paper
News and Uncertainty Shocks
We provide novel evidence that technological news and uncertainty shocks, identified one at a time using VAR models as in the literature, are correlated; that is, they are not truly structural. We then proceed by proposing an identification scheme to disentangle the effects of news and financial uncertainty shocks. We find that by removing uncertainty effects from news shocks, the positive responses of economic activity to news shocks are strengthened in the short term; and that the negative responses of activity to financial uncertainty shocks are deepened in the medium term as ?good ...
Working Paper
What drives commodity price booms and busts?
What drives commodity price booms and busts? We provide evidence on the dynamic effects of commodity demand shocks, commodity supply shocks, and inventory demand shocks on real commodity prices. In particular, we analyze a new data set of price and production levels for 12 agricultural, metal, and soft commodities from 1870 to 2013. We identify differences in the type of shock driving prices of the various types of commodities and relate these differences to commodity types which reflect differences in long-run elasticities of supply and demand. Our results show that demand shocks strongly ...