Search Results
Working Paper
Taylor Rule Estimation by OLS
Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, that are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term – hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, however, IV estimation poses challenges, as the validity of potential instruments depends on various unobserved features of ...
Working Paper
Aggregation and the PPP puzzle in a sticky-price model
We study the purchasing power parity (PPP) puzzle in a multi-sector, two-country, sticky- price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. We show analytically that in this economy, deviations of the real exchange rate from PPP are more volatile and persistent than in a counterfactual one-sector world economy that features the same average frequency of price changes, and ...
Working Paper
Do people undestand monetary policy?
We combine questions from the Michigan Survey about the future path of prices, interest rates, and unemployment to investigate whether U.S. households are aware of the so-called Taylor (1993) rule. For comparison, we perform the same analysis using questions from the Survey of Professional Forecasters. Our findings support the view that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules. The extent to which this happens, however, does not appear to be uniform across income and ...
Working Paper
Real exchange rate dynamics in sticky-price models with capital
The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and ...
Working Paper
Demographics and Real Interest Rates Across Countries and Over Time
We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments ...
Journal Article
Fed communication and the zero lower bound
After the onset of the global financial crisis, the Federal Reserve had to rely on other tools?including communication?to work around the constraints of being unable to lower the federal funds rate below zero. One way to assess how effective these communications were is by estimating how interest rates on bonds with different maturities reacted to Fed communications before and after the zero-bound period. A measure based on news reports of Fed communications suggests that this tool gave the Fed some ability to affect long-term yields through its communications.
Journal Article
Policy initiatives in the global recession: what did forecasters expect?
The global recession of 2008-09 led to monetary and fiscal policy responses by central banks and government authorities that were often unconventional in size and scope. A study of expansionary measures employed during the recession suggests that overall, the policies were likely effective in shaping the outlook for a recovery, as forecasters raised their expectations of inflation and GDP growth after the policies? implementation. From this perspective, the policies stimulated economic activity and prevented deflationary pressures during the financial crisis.
Working Paper
Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models
We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence ? policy inertia or persistent policy shocks ? is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary ...
Journal Article
Demographic Transition and Low U.S. Interest Rates
Interest rates have been trending down for more than two decades. One possible explanation is the dramatic worldwide demographic transition, with people living longer and population growth rates declining. This demographic transition in the United States?particularly the steady increase in life expectancy?put significant downward pressure on interest rates between 1990 and 2016. Because demographic movements tend to be long-lasting, their ongoing effects could keep interest rates near the lower bound longer. This has the potential to limit the scope for central banks to respond to future ...
Working Paper
Measuring the effect of the zero lower bound on monetary policy
The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed?s ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed ...