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Discussion Paper
Understanding unit rooters: a helicopter tour
Report
When does a central bank’s balance sheet require fiscal support?
Using a simple general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance sheet support?a within-government transaction?is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank?s balance sheet is merged with that of the rest of the government.
Discussion Paper
Central Bank Solvency and Inflation
The monetary base in the United States, defined as currency plus bank reserves, grew from about $800 billion in 2008 to $2 trillion in 2012, and to roughly $4 trillion at the end of 2014 (see chart below). Some commentators have viewed this increase in the monetary base as a sure harbinger of inflation. For example, one economist wrote that this “unprecedented expansion of the money supply could make the ’70s look benign.” These predictions of inflation rest on the monetarist argument that nominal income is proportional to the money supply. The fact that the money supply has expanded ...
Journal Article
Are forecasting models usable for policy analysis?
In this article, Christopher A. Sims argues the answer to his title is yes. Sims explains that any decisionmaking model must incorporate some identifying assumptions to enable it to forecast the effects of alternative decisions. He argues that although all identifying assumptions in econometric policymaking models are of uncertain validity, those incorporated in vector autoregression (VAR) forecasting models have the advantage of allowing their uncertainty to be measured. Sims concludes by demonstrating a method for identifying a small macroeconomic VAR model so that it can be used to analyze ...
Journal Article
Inflation and growth - commentary
Working Paper
Were there regime switches in U.S. monetary policy?
A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with U.S. data since 1959. The best fit is with a model that allows time variation in structural disturbance variances only. Among models that also allow for changes in equation coefficients, the best fit is for a model that allows coefficients to change only in the monetary policy rule. That model allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most ...
Conference Paper
Improving monetary policy models
Working Paper
Error bands for impulse responses
We examine the theory and behavior in practice of Bayesian and bootstrap methods for generating error bands on impulse responses in dynamic linear models. The Bayesian intervals have a firmer theoretical foundation in small samples, are easier to compute, and are about as good in small samples by classical criteria as are the best bootstrap intervals. Bootstrap intervals based directly on the simulated small-sample distribution of an estimator, without bias correction, perform very badly. We show that a method that has been used to extend to the overidentified case standard algorithms for ...
Discussion Paper
Models and their uses
It is argued that economists ought to recognize that modeling in different styles will be appropriate for different purposes or different stages in the development of an area of economics. As an example, the paper displays simulations of a stochastic general equilibrium model which shed light on the interpretation of widely discussed small macroeconomic vector autoregressive models connecting monetary variables to output and prices.