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Working Paper
Has U.S. Monetary Policy Tracked the Efficient Interest Rate?
Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to ...
Working Paper
Monetary Policy Strategies and Tools: Financial Stability Considerations
This paper examines potential interactions between financial stability and the monetary policy strategies and tools considered in the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. Achieving the Federal Reserve’s goals of full employment and price stability promotes financial stability. A key concern, however, is that with a low equilibrium real interest rate, a low policy rate will be necessary, and in turn, these low rates may contribute to an increase in financial system vulnerabilities. Our analysis suggests that there are typically ...
Working Paper
Foreign Effects of Higher U.S. Interest Rates
This paper analyzes the spillovers of higher U.S. interest rates on economic activity in a large panel of 50 advanced and emerging economies. We allow the response of GDP in each country to vary according to its exchange rate regime, trade openness, and a vulnerability index that includes current account, foreign reserves, inflation, and external debt. We document large heterogeneity in the response of advanced and emerging economies to U.S. interest rate surprises. In response to a U.S. monetary tightening, GDP in foreign economies drops about as much as it does in the United States, with a ...
Working Paper
Risk-Taking Spillovers of U.S. Monetary Policy in the Global Market for U.S. Dollar Corporate Loans
We study the effects of U.S. interest rates and other factors on risk-taking in the global market for U.S. dollar syndicated term loans. We find that, before the Global Financial Crisis, both U.S. and non-U.S. lenders originated ex ante riskier loans to non-U.S. borrowers in response to a decline in short-term U.S. interest rates and, after the crisis, in response to a decline in longer-term U.S. interest rates. After the crisis, this behavior was more prominent for shadow banks and less prominent for banks with relatively low capital. Separately, before the crisis, lenders originated less ...
Working Paper
Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate
Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of ...
Working Paper
Drifts, Volatilities, and Impulse Responses Over the Last Century
How much have the dynamics of U.S. time series and in particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "a lot" and "probably less than you think," respectively. We use vector autoregressions with time-varying parameters and stochastic volatility to tackle these questions. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term nominal ...