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Working Paper
The Macroeconomic Risks of Undesirably Low Inflation
This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
Working Paper
Usual Shocks in our Usual Models
We propose an event-study research design to identify the nature and propagation of large unusual shocks in DSGE models and apply it to study the macroeconomic effects of the Covid shock. The initial outbreak is represented as the onset of a new shock process where the shock loads on wedges associated with the model's usual shocks. Realizations of the Covid shock come with news about its propagation, allowing us to disentangle the role of beliefs about the future of the pandemic. The model attributes a crucial role to the novel Covid shock in explaining the large contraction in output in the ...
Working Paper
A DSGE Model Including Trend Information and Regime Switching at the ZLB
This paper outlines the dynamic stochastic general equilibrium (DSGE) model developed at the Federal Reserve Bank of Cleveland as part of the suite of models used for forecasting and policy analysis by Cleveland Fed researchers, which we have nicknamed CLEMENTINE (CLeveland Equilibrium ModEl iNcluding Trend INformation and the Effective lower bound). This document adopts a practitioner's guide approach, detailing the construction of the model and offering practical guidance on its use as a policy tool designed to support decision-making through forecasting exercises and policy counterfactuals.
Working Paper
A Structural Approach to Combining External and DSGE Model Forecasts
This note shows that combining external forecasts such as the Survey of Professional Fore casters can significantly increase DSGE forecast accuracy while preserving the interpretability in terms of structural shocks. Applied to pseudo real-time from 1997q2 onward, the canonical Smets and Wouters (2007) model has significantly smaller forecast errors when giving a high weight to the SPF forecasts. Incorporating the SPF forecast gives a larger role to risk premium shocks during the global financial crisis. A model with financial frictions favors a larger weight on the DSGE model forecast.
Working Paper
A narrative approach to a fiscal DSGE model
This version: March 28, 2016 First version: February 2014 {{p}} Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified VARs based on narrative shocks. This paper asks whether both approaches agree. First, I show that, theoretically, the narrative VAR approach is valid in a class of DSGE models with Taylor-type policy rules. Second, I quantify whether the two approaches also agree empirically, that is, ...
Working Paper
Money-Financed Fiscal Programs : A Cautionary Tale
A number of prominent economists and policymakers have argued that money-?nanced ?scal programs (helicopter drops) could be e?cacious in boosting output and in?ation in economies facing persistent economic weakness, very low in?ation, and signi?cant ?scal strains. We employ a fairly conventional macroeconomic model to explore the possible e?ects of such policies. While we do ?nd that money-?nanced ?scal programs, if communicated successfully and seen as credible by the public, could provide signi?cant stimulus, we underscore the risks that would be associated with such a program. These risks ...
Working Paper
Equilibrium Yield Curves with Imperfect Information
I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. The model generates term premia that are on average positive with sizable countercyclical variation that arises endogenously. Importantly, demand shocks, in addition to supply shocks, play a key role in the dynamics of term premia. This is in sharp contrast to existing DSGE term structure models with perfect information, which tend to rely on large supply shocks to generate timevariation in yields and term ...
Working Paper
Assessing U.S. Aggregate Fluctuations Across Time and Frequencies
We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks ...