Search Results
Report
Central bank transparency and nonlinear learning dynamics
Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive ...
Discussion Paper
Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting
Following the June 18-19 Federal Open Market Committee (FOMC) meeting different measures of short-term interest rates increased notably. In the chart below, we plot two such measures: the two-year Treasury yield and the one-year overnight indexed swap (OIS) forward rate, one year in the future. The vertical line indicates the final day of the June FOMC meeting. To what extent did this rise in rates following the June FOMC meeting reflect a shift in the expected future path of the federal funds rate (FFR)? Market participants and policy makers often directly read the expected path from ...
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.
Report
Fiscal foundations of inflation: imperfect knowledge
This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require ...
Discussion Paper
The FRBNY DSGE Model Forecast
The U.S. economy has been in a gradual but slow recovery. Will the future be more of the same? This post presents the current forecasts from the Federal Reserve Bank of New York’s (FRBNY) DSGE model, described in our earlier “Bird’s Eye View” post, and discusses the driving forces behind the forecasts. Find the code used for estimating the model and producing all the charts in this blog series here. (We should reiterate that these are not the official New York Fed staff forecasts, but only an input to the overall forecasting process at the Bank.)
Report
Long-term debt pricing and monetary policy transmission under imperfect knowledge
Under rational expectations, monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure: Anticipated movements in future short-term interest rates control current demand. This paper explores the effects of monetary policy under imperfect knowledge and incomplete markets. In this environment, the expectations hypothesis of the yield curve need not hold, a situation called unanchored financial market expectations. Whether or not financial market expectations are anchored, the private ...
Report
Central bank transparency under model uncertainty
This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the "correct" model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. ; The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations ...
Report
A Large Bayesian VAR of the United States Economy
We model the United States macroeconomic and financial sectors using a formal and unified econometric model. Through shrinkage, our Bayesian VAR provides a flexible framework for modeling the dynamics of thirty-one variables, many of which are tracked by the Federal Reserve. We show how the model can be used for understanding key features of the data, constructing counterfactual scenarios, and evaluating the macroeconomic environment both retrospectively and prospectively. Considering its breadth and versatility for policy applications, our modeling approach gives a reliable, reduced form ...
Discussion Paper
Data Insight: Which Growth Rate? It’s a Weighty Subject
The growth rate in real gross domestic product (GDP) is a conventional indicator of the economy’s health. But the two ways of measuring annual GDP growth can give very different answers. In 2013, GDP grew 2.2 percent on a year-over-year basis, but at a faster 3.1 percent rate on a Q4-over-Q4 basis. So, which measure is more meaningful? We show in this post that the Q4/Q4 metric is better since it only considers quarterly growth rates during the current year, while the Year/Year measure depends on quarterly growth rates in both the current and previous year and puts considerable weight on ...
Discussion Paper
Connecting “The Dots”: Disagreement in the Federal Open Market Committee
People disagree, and so do the members of the Federal Open Market Committee (FOMC). How much do they disagree? Why do they disagree? We look at the FOMC’s projections of the federal funds rate (FFR) and other variables and compare them with those in the New York Fed’s Survey of Primary Dealers (SPD). We show that the members of the FOMC tend to disagree more than the primary dealers and offer some potential explanations.