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Working Paper
Signaling Effects of Monetary Policy
We develop a dynamic general equilibrium model in which the policy rate signals the central bank?s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters? inflation expectations. This model improves upon existing perfect information models in explaining why, in the data, inflation expectations respond with delays to monetary impulses and remain disanchored for years. In the 1970s, U.S. monetary policy is found to signal persistent inflationary ...
Working Paper
Forecasting Economic Activity with Mixed Frequency Bayesian VARs
Mixed frequency Bayesian vector autoregressions (MF-BVARs) allow forecasters to incorporate a large number of mixed frequency indicators into forecasts of economic activity. This paper evaluates the forecast performance of MF-BVARs relative to surveys of professional forecasters and investigates the influence of certain specification choices on this performance. We leverage a novel real-time dataset to conduct an out-of-sample forecasting exercise for U.S. real gross domestic product (GDP). MF-BVARs are shown to provide an attractive alternative to surveys of professional forecasters for ...
Working Paper
Reconciling VAR-based Forecasts with Survey Forecasts
This paper proposes a novel Bayesian approach to jointly model realized data and survey forecasts of the same variable in a vector autoregression (VAR). In particular, our method imposes a prior distribution on the consistency between the forecast implied by the VAR and the survey forecast for the same variable. When the prior is placed on unconditional forecasts from the VAR, the prior shapes the posterior of the reduced-form VAR coefficients. When the prior is placed on conditional forecasts (specifically, impulse responses), the prior shapes the posterior of the structural VAR ...
Working Paper
Can Forecast Errors Predict Financial Crises? Exploring the Properties of a New Multivariate Credit Gap
Yes, they can. I propose a new method to detect credit booms and busts from multivariate systems -- monetary Bayesian vector autoregressions. When observed credit is systematically higher than credit forecasts justified by real economic activity variables, a positive credit gap emerges. The methodology is tested for 31 advanced and emerging market economies. The resulting credit gaps fit historical evidence well and detect turning points earlier, outperforming the credit-to-GDP gaps in signaling financial crises, especially at longer horizons. The results survive in real time and can shed ...
Working Paper
A narrative approach to a fiscal DSGE model
This version: March 28, 2016 First version: February 2014 {{p}} Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified VARs based on narrative shocks. This paper asks whether both approaches agree. First, I show that, theoretically, the narrative VAR approach is valid in a class of DSGE models with Taylor-type policy rules. Second, I quantify whether the two approaches also agree empirically, that is, ...
Working Paper
Drifts, Volatilities, and Impulse Responses Over the Last Century
How much have the dynamics of U.S. time series and in particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "a lot" and "probably less than you think," respectively. We use vector autoregressions with time-varying parameters and stochastic volatility to tackle these questions. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term ...
Working Paper
Have Standard VARs Remained Stable since the Crisis?
Small or medium-scale VARs are commonly used in applied macroeconomics for forecasting and evaluating the shock transmission mechanism. This requires the VAR parameters to be stable over the evaluation and forecast sample, or to explicitly consider parameter time variation. The earlier literature focused on whether there were sizable parameter changes in the early 1980s, in either the conditional mean or variance parameters, and in the subsequent period till the beginning of the new century. In this paper we conduct a similar analysis but focus on the effects of the recent crisis. Using a ...