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Working Paper
Credible Forward Guidance
We analyze credible forward guidance policies in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates by solving a series of optimal sustainable policy problems indexed by the duration of reputational loss. Lower-for-longer policies---while effective in stimulating the economy at the ELB---are potentially time-inconsistent, as the associated overheating of the economy in the aftermath of a crisis is undesirable ex post. However, if reneging on a lower-for-longer promise leads to a loss of reputation and prevents the central bank from effectively using ...
Working Paper
Raising an Inflation Target : The Japanese Experience with Abenomics
This paper draws from Japan?s recent monetary experiment to examine the effects of an increase in the inflation target during a liquidity trap. We review Japanese data and examine through a VAR model how macroeconomic variables respond to an identified inflation target shock. We apply these findings to calibrate the effect of a shock to the inflation target in a new-Keynesian DSGE model of the Japanese economy. We argue that imperfect observability of the inflation target and a separate exchange rate shock are needed to successfully account for the behavior of nominal and real variables in ...
Working Paper
Three Scenarios for Interest Rates in the Transition to Normalcy
This article develops time-series models to represent three alternative, potential monetary policy regimes as monetary policy returns to normal. The first regime is a return to the high and volatile inflation rate of the 1970s. The second regime, the one that most Federal Reserve officials and business economists expect, is a return to the credible low inflation policy that characterized the U.S. economy from 1983 to 2007, a period that has come to be known as the Great Moderation. The third regime is one in which policymakers decide to keep policy interest rates at or near zero for the ...