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Working Paper
Considerations Regarding Inflation Ranges
Siemer, Michael; Doyle, Brian M.; Hebden, James; Chung, Hess T. (2020-08-27)
We consider three ways that a monetary policy framework may employ a range for inflation outcomes: (1) ranges that acknowledge uncertainty about inflation outcomes (uncertainty ranges), (2) ranges that define the scope for intentional deviations of inflation from its target (operational ranges), and (3) ranges over which monetary policy will not react to inflation deviations (indifference ranges). After defining these three ranges, we highlight a number of costs and benefits associated with each. Our discussion of the indifference range is accompanied by simulations from the FRB/US model, ...
Finance and Economics Discussion Series , Paper 2020-075

Working Paper
Labor Supply Shocks, Labor Force Entry, and Monetary Policy
Kurozumi, Takushi; Van Zandweghe, Willem (2022-05-24)
Should monetary policy offset the effects of labor supply shocks on inflation and the output gap? Canonical New Keynesian models answer yes. Motivated by weak labor force participation during the pandemic, we reexamine the question by introducing labor force entry and exit in an otherwise canonical model with sticky prices and wages. The entry decision generates an employment channel of monetary policy, and a labor supply shock to the value of nonparticipation in the labor market induces a policy trade-off between stabilization of the employment gap and wage growth. For an adverse labor ...
Working Papers , Paper 22-17

Journal Article
Did Communicating a Numerical Inflation Target Anchor U.S. Inflation Expectations?
Bundick, Brent; Smith, Andrew Lee (2018-01-17)
Macro Bulletin

Working Paper
Noisy information, distance and law of one price dynamics across US cities
Crucini, Mario J.; Tsuruga, Takayuki; Shintani, Mototsugu (2014-11-01)
Using US micro price data at the city level, we provide evidence that both the volatility and the persistence of deviations from the law of one price (LOP) are rising in the distance between US cities. A standard, two-city, stochastic equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance. To account for the latter fact, we augment the standard model with noisy signals about the state of nominal aggregate demand that are asymmetric across cities. We further show that the main predictions of the model continue to ...
Globalization Institute Working Papers , Paper 216

Working Paper
Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle
Nicolo, Giovanni (2020-05-05)
I estimate a medium-scale New-Keynesian model and relax the conventional assumption that the central bank adopted an active monetary policy by pursuing inflation and output stability over the entire post-war period. Even after accounting for a rich structure, I find that monetary policy was passive prior to the Volcker disinflation. Sunspot shocks did not represent quantitatively relevant sources of volatility. By contrast, such passive interest rate policy accommodated fundamental productivity and cost shocks that de-anchored inflation expectations, propagated via self-fulfilling inflation ...
Finance and Economics Discussion Series , Paper 2020-035

Newsletter
Some inflation scenarios for the American Rescue Plan Act of 2021
Fisher, Jonas D. M.; Melosi, Leonardo; Bianchi, Francesco (2021-04-13)
The American Rescue Plan Act (ARP) signed into law on March 11, 2021, authorized approximately $1.9 trillion in federal government spending. ARP is widely expected to boost economic growth over the next two to three years—and significantly so early on. The upswing in growth is likely to increase resource pressures and therefore consumer price inflation as well. The potential for this channel to raise inflation substantially has attracted the attention of economic commentators, including Olivier Blanchard and Lawrence Summers. But the magnitudes and persistence of the possible increases in ...
Chicago Fed Letter , Issue 453 , Pages 8

Working Paper
Liquidity Premiums on Government Debt and the Fiscal Theory of the Price Level
Berentsen, Aleksander; Waller, Christopher J. (2017-03-29)
We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or ...
Working Papers , Paper 2017-8

Working Paper
Sticky Leverage: Comment
Ajello, Andrea; Pérez-Orive, Ander; Szőke, Bálint (2023-07-26)
We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016, henceforth GJS). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.
Finance and Economics Discussion Series , Paper 2023-051

Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Gourio, Francois; Ngo, Phuong (2020-01-02)
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper Series , Paper WP 2020-01

Working Paper
Monetary Policy and Durable Goods
House, Christopher L.; Kimball, Miles; Boehm, Christoph E.; Barsky, Robert (2016-11-06)
We analyze monetary policy in a New Keynesian model with durable and nondurable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known ?divine coincidence.? In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation ...
Working Paper Series , Paper WP-2016-18

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