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Discussion Paper
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 ...
Discussion Paper
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 ...
Discussion Paper
Exchange rate policies
Modern macroeconomic theory teaches us new lessons about exchange rates: Currency depreciations or appreciations that change the relative competitiveness of producers in different countries are undesirable from a global perspective if they lead to relative prices that do not reflect the true relative costs of production. From this standpoint, "external balance" does not mean that trade balances should be zero, but rather that global resources are allocated efficiently. The implications of this insight for the role of the exchange rate in monetary policy are explored here. Some of the ...
Discussion Paper
Assessing monetary accommodation: a simple empirical model of monetary policy and its implications for unemployment and inflation
This note suggests that household wealth growth and a long-forward interest rate can be used to construct a simple and convenient reference standard for assessing the current stance of monetary policy. It shows that the difference between the federal funds rate and this reference interest rate is a powerful predictor of the unemployment rate and inflation, producing real-time forecasts that are competitive with consensus-based forecasts from surveys of forecasting professionals. Moreover, one can understand past FOMC policy actions as efforts to adjust the stance of policy, so measured, in ...
Discussion Paper
The difficult art of eliciting long-run inflation expectations from government bond prices
Central banks are always concerned with keeping long-run inflation expectations well anchored at some implicit or explicit low target inflation rate. To that end, they are constantly on the lookout for indicators that can gauge those expectations accurately. One such indicator frequently reported in the specialized financial press and by central banks around the world is constructed with the forward rates technique, which exploits price differentials between government bonds of various maturities. This article examines the theory behind those indicators and assesses the extent to which they ...
Discussion Paper
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.
Discussion Paper
Exchange rate pass-through into U.K. import prices: evidence from disaggregated data
In this paper we estimate the rate of exchange rate pass-through (ERPT) into U.K. import prices using disaggregated data at the SITC-2 and SITC-3 digit levels. We show that the ERPT varies at the disaggregate level. Because of this heterogeneity at the disaggregate level, the estimate of the ERPT using aggregate data is found substantially upward-biased in our U.K. data. The upward bias exaggerates the impact of exchange rate movements on the competitiveness of imported goods relative to domestically produced goods. Further, we investigate the source of the heterogeneity of the ERPT at the ...
Discussion Paper
An IS-LM analysis of the zero-bound problem
Policy options for stimulating real activity are limited once short-term interest rates have been driven to zero. Monetary policy makers face the difficult challenge of preventing or reversing declines in near-term inflation expectations while preserving confidence in the central bank's commitment to long-term price stability. Fiscal policy makers must commit to a credible plan for maintaining or raising near-term government purchases while minimizing increases in future marginal tax rates.
Discussion Paper
Openness and inflation
This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country's openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship?that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper?seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which ...
Discussion Paper
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 ...