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Keywords:Stochastic analysis 

Inflation dynamics in a small open-economy model under inflation targeting: some evidence from Chile

This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Gal and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the dynamic response of inflation to domestic and external shocks, and the change in these dynamics under different policy parameters. We use the DSGE-VAR methodology from our earlier work (2007) to assess the robustness of the conclusion to the presence ...
Staff Reports , Paper 329

Evaluating interest rate rules in an estimated DSGE model

The empirical DSGE (dynamic stochastic general equilibrium) literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound, but their relative merit is rarely discussed. We contribute to filling this gap by comparing the fit of a large set of interest rate rules (fifty-five in total), which we estimate within a simple New Keynesian model. We find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level?the one that would prevail in the absence of ...
Staff Reports , Paper 510

Assessing the quality of “Furfine-based” algorithms

To conduct academic research on the federal funds (fed funds) market, historically one of the most important financial markets in the U.S., some empirical economists have used market level measures published by the Markets Group at the Federal Reserve Bank of New York (FRBNY). To obtain more disaggregate data, some researchers have relied on a separate source of information: individual transactions inferred indirectly from an algorithm based on the work of Furfine (1999). To date, however, the accuracy of this algorithm has not been formally established. In this paper, we conduct a test aimed ...
Staff Reports , Paper 575

The term structure of inflation expectations

We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model not only to yields, but also to the yields' variance-covariance matrix, thus increasing identification power. We find that model-implied inflation expectations can differ substantially from break-even inflation rates when market volatility is high. Our model's ability to be updated weekly makes it ...
Staff Reports , Paper 362

Working Paper
A Bayesian multi-factor model of instability in prices and quantities of risk in U.S. financial markets

This paper analyzes the empirical performance of two alternative ways in which multi-factor models with time-varying risk exposures and premia may be estimated. The first method echoes the seminal two-pass approach advocated by Fama and MacBeth (1973). The second approach extends previous work by Ouysse and Kohn (2010) and is based on a Bayesian approach to modelling the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979-2008 U.S. data for stock, bond, and publicly traded real estate returns shows that the classical, two-stage approach ...
Working Papers , Paper 2011-003

Working Paper
Reputation, career concerns, and job assignments

Does a worker who had a successful career have stronger or weaker incentives to manipulate his reputation than a worker who performed poorly? This paper presents a tractable model that allows us to study career concerns when the strength of a worker?s incentives depends on his employment history (the history of his past actions, jobs, and performances). More specifically, the paper incorporates standard job assignments into the main model in Holmstrom?s (1999) seminal paper on career concerns. Equilibrium wages, equilibrium job assignments, and the strength of career-concern incentives are ...
Working Paper , Paper 06-01

Working Paper
Stochastic volatility

Given the importance of return volatility on a number of practical financial management decisions, the efforts to provide good real- time estimates and forecasts of current and future volatility have been extensive. The main framework used in this context involves stochastic volatility models. In a broad sense, this model class includes GARCH, but we focus on a narrower set of specifications in which volatility follows its own random process, as is common in models originating within financial economics. The distinguishing feature of these specifications is that volatility, being inherently ...
Working Paper Series , Paper WP-09-04

Working Paper
The Chicago Fed DSGE model

The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This article describes its specification and estimation, its dynamic characteristics and how it is used to forecast the US economy. In many respects the model resembles other medium scale New Keynesian frameworks, but there are several features which distinguish it: the monetary policy rule includes forward guidance, productivity is driven by neutral and investment specific technical change, multiple price indices identify inflation and there ...
Working Paper Series , Paper WP-2012-02

Working Paper
Realized volatility

Realized volatility is a nonparametric ex-post estimate of the return variation. The most obvious realized volatility measure is the sum of finely-sampled squared return realizations over a fixed time interval. In a frictionless market the estimate achieves consistency for the underlying quadratic return variation when returns are sampled at increasingly higher frequency. We begin with an account of how and why the procedure works in a simplified setting and then extend the discussion to a more general framework. Along the way we clarify how the realized volatility and quadratic return ...
Working Paper Series , Paper WP-08-14

Working Paper
Documentation of the Research and Statistics Division’s estimated DSGE model of the U.S. economy: 2006 version

This paper provides documentation for the large-scale estimated DSGE model of the U.S. economy used in Edge, Kiley, and Laforte (2007). The model represents part of an ongoing research project (the Federal Reserve Board's Estimated, Dynamic, Optimization-based--FRB/EDO--model project) in the Macroeconomic and Quantitative Studies section of the Federal Reserve Board aimed at developing a DSGE model that can be used to address practical policy questions and the model documented here is the version that was current at the end of 2006. The paper discusses the model's specification, estimated ...
Finance and Economics Discussion Series , Paper 2007-53


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