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Report
Stabilizing expectations under monetary and fiscal policy coordination
Eusepi, Stefano; Preston, Bruce (2008)
This paper analyzes how the formation of expectations constrains monetary and fiscal policy design. Economic agents have imperfect knowledge about the economic environment and the policy regime in place. Households and firms learn about the policy regime using historical data. Regime uncertainty substantially narrows, relative to a rational expectations analysis of the model, the menu of policies consistent with expectations stabilization. When agents are learning about the policy regime, there is greater need for policy coordination: the specific choice of monetary policy limits the set of ...
Staff Reports , Paper 343

Report
Optimal monetary and fiscal policy under discretion in the New Keynesian model: a technical appendix to \\"Great Expectations and the End of the Depression\\"
Eggertsson, Gauti B. (2005)
This paper details the microfoundations of the model presented in Staff Report no. 234, "Great Expectations and the End of the Depression." It defines the Markov perfect equilibrium formally in the nonlinear model, discusses in some detail the approximation method used and the order of accuracy of this approximation, and gives proofs of two propositions not proved in Staff Report no. 234. In addition, this paper states a proposition that shows the equivalence between the linear quadratic approximation in Staff Report no. 234 and a first order approximation to the exact nonlinear ...
Staff Reports , Paper 235

Report
Long-term debt pricing and monetary policy transmission under imperfect knowledge
Giannoni, Marc; Eusepi, Stefano; Preston, Bruce (2012)
Under rational expectations, monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure: Anticipated movements in future short-term interest rates control current demand. This paper explores the effects of monetary policy under imperfect knowledge and incomplete markets. In this environment, the expectations hypothesis of the yield curve need not hold, a situation called unanchored financial market expectations. Whether or not financial market expectations are anchored, the private ...
Staff Reports , Paper 547

Report
Great expectations and the end of the depression
Eggertsson, Gauti B. (2005)
This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and-even more important-announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that ...
Staff Reports , Paper 234

Monograph
Rational expectations - fresh ideas that challenge some established views of policy making
anonymous (1979)
originally appeared in the Federal Reserve Bank of Minneapolis Annual Report, 1977
Monograph

Report
Can U.S. monetary policy fall (again) into an expectation trap?
Armenter, Roc; Bodenstein, Martin (2005)
We provide a tractable model to study monetary policy under discretion. We restrict our analysis to Markov equilibria. We find that for all parametrizations with an equilibrium inflation rate of about 2 percent, there is a second equilibrium with an inflation rate just above 10 percent. Thus, the model can simultaneously account for the low and high inflation episodes in the United States. We carefully characterize the set of Markov equilibria along the parameter space and find our results to be robust, suggesting that expectation traps are more than just a theoretical curiosity.
Staff Reports , Paper 229

Journal Article
Are economic forecasts rational?
Runkle, David E.; Keane, Michael P. (1989-04)
This paper discusses at an undergraduate level how forecast rationality can be tested. It explains that forecasters should correctly use any relevant information they knew in making their predictions. It shows that forecast rationality can be tested by determining whether the forecasters' prediction errors are predictable. After addressing what data and methods can be used for testing rationality, the paper presents tests of the price-forecast rationality of individual professional forecasters. Unlike results of previous studies, the test results show that those forecasters' price predictions ...
Quarterly Review , Volume 13 , Issue Spr , Pages 26-33

Journal Article
Greater than the sum: the Minneapolis Fed and the University of Minnesota: a partnership
Clement, Douglas (2000-12)
The Region , Volume 14 , Issue Dec , Pages 22-25, 48-51

Report
Solution of linear-quadratic- Gaussian dynamic games using variational methods
Roberds, William (1986)
Methods are presented for solving a certain class of rational expectations models, principally those that arise from dynamic games. The methods allow for numerical solution using spectral factorization algorithms and for estimation of these models using maximum likelihood techniques.
Staff Report , Paper 105

Working Paper
Federal reserve forecasts: asymmetry and state-dependence
Caunedo, Julieta; DiCecio, Riccardo; Komunjer, Ivana; Owyang, Michael T. (2013)
We jointly test the rationality of the Federal Reserve?s Greenbook forecasts of infiation, unemployment, and output growth using a multivariate nonseparable asymmetric loss function. We find that the forecasts are rationalizable and exhibit directional asymmetry. The degree of asymmetry depends on the phase of the business cycle: The Greenbook forecasts of output growth are too pessimistic in recessions and too optimistic in expansions. The change in monetary policy that occured in the late 1970s has been attributed in the literature to the Fed coming to terms with the difficulties in ...
Working Papers , Paper 2013-012

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