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Journal Article
The Highs and Lows of Productivity Growth
Productivity growth shows evidence of switching between long periods of high and low average growth. Estimates suggest that the United States has been in the low-growth regime since 2004. Assuming this low growth continues, productivity growth in the year 2025 would be 0.6%. By dropping this assumption and allowing for a switch to consistent higher growth, an alternative estimate forecasts that the distribution of possible productivity growth across quarters could average about 1.1% in 2025.
Working Paper
Asset Purchases in a Monetary Union with Default and Liquidity Risks
We develop a nonlinear two-country monetary union model with endogenous sovereign default and financial intermediation to study the effects of targeted asset purchases, and expectations of such programs, during sovereign debt crises. Default risk increases with government debt and shifts in investors’ perceptions of fiscal solvency. We calibrate the model to Italy and Germany during the 2012 European debt crisis; it reproduces key features of the data, including the periphery-core divergence in investment, output, and sovereign yields. Cross-border transmission depends on the ...
Journal Article
Monetary Policy Stance Is Tighter than Federal Funds Rate
The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target. A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022.
Working Paper
The Past and Future of U.S. Structural Change: Compositional Accounting and Forecasting
We explore the evolving significance of different production sectors within the U.S. economy since World War II and provide methods for estimating and forecasting these shifts. Using a compositional accounting approach, we find that the well-documented transition from goods to services is primarily driven by two compositional changes: 1) the rise of Intellectual Property Products (IPP) as an input producer, replacing Durable Goods almost one-for-one in terms of input shares in virtually all sectors; and 2) a shift in consumer spending from Nondurable Goods to Services. A structural model ...
Working Paper
Asset Purchases in a Monetary Union with Default and Liquidity Risks
Using a two-country monetary union framework with financial frictions, we quantify the efficacy of targeted asset purchases, as well as expectations of such programs, in the presence of sovereign default and financial liquidity risks. The risk of default increases with the level of government debt and shifts in investors' perception of fiscal solvency. Liquidity risks increase when the probability of default affects the tightness of credit markets. We calibrate the model to Italy during the 2012 European debt crisis and compare it to key features of the data. We find that changes in ...
Working Paper
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The ...
Working Paper
Asset Purchases in a Monetary Union with Default and Liquidity Risks
Using a two-country monetary-union framework with financial frictions, we study sovereign default and liquidity risks and quantify the efficacy of asset purchases. Default risk increases with government indebtedness and shifts in the fiscal limit perceived by investors. Liquidity risks increase when the default probability affects credit market tightness. The framework indicates that shifts in fiscal limits, more than rising government debt, played a crucial role for Italy around 2012. While both default and liquidity risks can dampen economic and financial conditions, the model suggests that ...
Journal Article
Evaluating Monetary Policy with Inflation Bands and Horizons
Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.
Working Paper
Aggregate Implications of Changing Sectoral Trends
We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and ...
Journal Article
Have Lags in Monetary Policy Transmission Shortened?
The Federal Open Market Committee’s monetary policy has expanded beyond changing the federal funds rate to include forward guidance and balance sheet policy. Using these tools may shorten lags in monetary policy transmitting to inflation. Using a proxy funds rate that incorporates tightening from these additional policy tools, we find evidence of a shorter lag in policy transmission to inflation since 2009, though with high associated uncertainty.