All in the family: the close connection between nominal-GDP targeting and the Taylor Rule
The classic Taylor rule for adjusting the stance of monetary policy is formally a special case of nominal- gross-domestic-product (GDP) targeting. Suitably implemented, moreover, nominal-GDP targeting satisfies the definition of a "flexible inflation targeting" policy rule. However, nominal-GDP targeting would require more discipline from policymakers than some analysts think is realistic.
Cross-country variation in the anchoring of inflation expectations
This paper develops a method for measuring the anchoring of long-run inflation expectations that does not require estimates of long-run inflation expectations. Such estimates exist for only a few developed economies, and even then only a short time series is available. By not requiring estimates of long-term inflation expectations, this method is able to measure the anchoring of inflation expectations in sixty-four different developed and developing countries. In addition, with rolling-window estimations we can measure the anchoring of expectations across time within a country, and thus we ...
Analyzing the export flow from Texas to Mexico
From 1997 to 2008, Texas shipped 40 percent of its manufacturing exports to Mexico. This puts Texas-Mexico among the largest state-country trading relationships. But this share has been declining recently. A gravity equation cannot account for either of these facts, even though Texas and Mexico share a border. This positive contiguity effect is not unique in state export data. I study the features of the Texas-Mexico relationship to try to account for the size of the export flow and the recent decline in share. Data limitations prevent a full accounting, but the most likely feature is the ...
How bad was it? The costs and consequences of the 2007–09 financial crisis
The 2007?09 financial crisis was associated with a huge loss of economic output and financial wealth, psychological consequences and skill atrophy from extended unemployment, an increase in government intervention, and other significant costs. Assuming the financial crisis is to blame for these associated ills, an estimate of its cost is needed to weigh against the cost of policies intended to prevent similar episodes. We conservatively estimate that 40 to 90 percent of one year's output ($6 trillion to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S. household) was foregone ...
The global slack hypothesis
We illustrate the analytical content of the global slack hypothesis in the context of a variant of the widely used New Open-Economy Macro model of Clarida, Gal, and Gertler (2002) under the assumptions of both producer currency pricing and local currency pricing. The model predicts that the Phillips curve for domestic CPI inflation will be flatter under most plausible parameterizations, the more important international trade is to the domestic economy. The model also predicts that foreign output gaps will matter for inflation dynamics, along with the domestic output gap. We also show that the ...
Estimating the output gap in real time
I propose a novel method of estimating the potential level of U.S. GDP in real time. The proposed wage-based measure of economic potential remains virtually unchanged when new data are released. The distance between current and potential output ? the output gap ? satisfies Okun?s law and outperforms many other measures of slack in forecasting inflation. Thus, I provide a robust statistical tool useful for understanding current economic conditions and guiding policymaking.
How the global perspective can help us identify structural shocks
This paper argues that global perspective can help us with the identification of structural shocks by utilizing the information on the signs of the responses of individual countries (cross section units). We demonstrate the main idea by means of Monte Carlo experiments and present an empirical application where we look at the effects of oil supply shocks on output and on global exchange rate constellation. Using a large-scale GVAR model of oil prices and the global economy, we find supply shocks tend to have a stronger impact on emerging economies' real output as compared with mature ...
The relative performance of alternative Taylor rule specifications
We look at how well several alternative Taylor rule specifications describe Federal Reserve policy decisions in real time, using the newly developed Giacomini and Rossi (2007) test for non-nested model selection in the presence of (possible) parameter instability. Further, we isolate those Taylor rule features that are most important for achieving relatively strong real-time performance. A second-order partial adjustment version of the Koenig (2004a) model performs consistently better than alternative specifications. Key features of this rule are the partial adjustment of the federal funds ...
Understanding the risks inherent in shadow banking: a primer and practical lessons learned
Examinations of the 2007?09 financial crisis often use the term shadow banking. This paper explains the form and functioning of the shadow banking system, how it relates to systemic risk and the recent financial crisis, and what particular aspects should be highlighted to benefit policymakers as they implement new regulations designed to enhance financial market resiliency. The paper is divided into two parts: The first serves as a primer on shadow banking; the second provides a narrative of how the system froze during the financial crisis and pertinent lessons learned for the current reform ...
Globalization, aggregate productivity, and inflation
This paper investigates the effects of globalization on aggregate productivity, output growth, and inflation. I present a simple two-country, two-good, flexible exchange rate model using Fisher Ideal aggregators to examine changes in the mapping from microeconomic to macroeconomic productivity growth as nations globalize. Advances in industry-specific labor productivity are shown to have potentially a much greater pass-through to aggregate productivity, output, and prices the more open nations are to trade. Globalization raises both the level and growth rate of aggregate productivity by ...