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Working Paper
A New Way to Quantify the Effect of Uncertainty
Throckmorton, Nathaniel A.; Richter, Alexander W. (2017-05-04)
This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step allows us to decompose the exogenous and endogenous sources of uncertainty, calculate the effect of volatility following the cost of business cycles literature, and generate data-driven policy functions for any higherorder moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante ...
Working Papers , Paper 1705

Report
The great escape? A quantitative evaluation of the Fed’s liquidity facilities
Eggertsson, Gauti B.; Del Negro, Marco; Kiyotaki, Nobuhiro; Ferrero, Andrea (2011)
We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities ...
Staff Reports , Paper 520

Working Paper
News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact
Kuester, Keith; Schoenle, Raphael; Dietrich, Alexander; Muller, Gernot J. (2020-04-09)
We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper ...
Working Papers , Paper 20-12

Working Paper
A Probability-Based Stress Test of Federal Reserve Assets and Income
Christensen, Jens H. E.; Lopez, Jose A.; Rudebusch, Glenn D. (2013-12-16)
To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed?s associated interest rate risk ? including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed?s losses are unlikely to be large and remittances are ...
Working Paper Series , Paper 2013-38

Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Gourio, François; Ngo, Phuong (2020-01-03)
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper Series , Paper WP-2020-01

Working Paper
Forecasts from Reduced-form Models under the Zero-Lower-Bound Constraint
Pasaogullari, Mehmet (2015-08-05)
In this paper, I consider forecasting from a reduced-form VAR under the zero lower bound (ZLB) for the short-term nominal interest rate. I develop a method that a) computes the exact moments for the first n + 1 periods when n previous periods are tracked and b) approximates moments for the periods beyond n + 1 period using techniques for truncated normal distributions and approximations a la Kim (1994). I show that the algorithm produces satisfactory results for VAR systems with moderate to high persistence even when only one previous period is tracked. For very persistent VAR systems, ...
Working Papers (Old Series) , Paper 1512

Working Paper
The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies
Engen, Eric M.; Laubach, Thomas; Reifschneider, David L. (2015-01-14)
After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools--quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate--in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time ...
Finance and Economics Discussion Series , Paper 2015-5

Working Paper
Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?
Christensen, Jens H. E.; Rudebusch, Glenn D. (2013-12-17)
Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. In modeling these yields, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, and a shadow-rate DTSM, which respects the ZLB. We find that the standard affine model is likely to exhibit declines in fit and forecast performance with very low interest rates. In contrast, the shadow-rate model mitigates ZLB problems significantly and we document superior performance for this model class in the most recent period.
Working Paper Series , Paper 2013-39

Working Paper
Forward guidance and the state of the economy
Throckmorton, Nathaniel A.; Keen, Benjamin D.; Richter, Alexander W. (2016-11-08)
This paper examines forward guidance using a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule. The effectiveness of forward guidance depends on the state of the economy, the speed of the recovery, the ZLB constraint, the degree of uncertainty, the monetary response to inflation, the size of the news shocks, and the forward guidance horizon. Specifically, the stimulus from forward guidance falls as the economy deteriorates or as households expect a slower recovery. When ...
Working Papers , Paper 1612

Working Paper
Government Debt Limits and Stabilization Policy
Young, Eric R.; Murphy, Daniel (2020-07-31)
We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at ...
Working Papers , Paper 20-23

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