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Working Paper
Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy
A consideration of the welfare consequences of two simple monetary policy rules--an interest rate peg and a money growth peg--in a dynamic general-equilibrium model, indicating that the interest rate rule dominates the money growth rule.
Working Paper
Taylor rules in a model that satisfies the natural rate hypothesis
The authors analyze the restrictions necessary to ensure that the interest-rate policy rule used by the central bank does not introduce real indeterminacy into the economy. They conduct this analysis in a flexible price economy and a sticky price model that satisfies the natural rate hypothesis. A necessary and sufficient condition for real determinacy in the sticky price model is that there must be nominal and real determinacy in the corresponding flexible price model. This arises if and only if the Taylor rule responds aggressively to lagged inflation rates.
Journal Article
Expected inflation and TIPS
When inflation-indexed Treasury securities were first introduced, economists hoped that they could be used to measure expected inflation easily. The only difference between securities that were indexed to inflation and those that were not was thought to be the extra compensation regular securities had to pay for what the market thought inflation would be. By now it is pretty clear that inflation-indexed Treasuries differ from regular securities in other ways that show up in the yields. This Commentary suggests what these are and discusses a method of correcting for them.
Journal Article
Monetary policy rules and stability: inflation targeting versus price-level targeting
Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But because banks base their actions on forecasts of future inflation, following the rule can lead to inflation-rate instability in some cases. A price-level target offers the same benefits as an inflation target but, because actions are based on past inflation, it avoids this vulnerability.
Working Paper
Privately optimal contracts and suboptimal outcomes in a model of agency costs
This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner?s ...
Working Paper
Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets
This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.
Working Paper
Inflation and output in New Keynesian models with a transient interest rate peg
Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary ...
Journal Article
Oil prices, monetary policy, and the macroeconomy
Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? The authors discuss how to disentangle these two effects.
Working Paper
Oil prices, monetary policy, and counterfactual experiments
Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects.
Journal Article
The Natural Rate of Interest in Taylor Rules
The Taylor rule suggests that the federal funds rate should be adjusted when inflation deviates from the Fed?s inflation target or when output deviates from the Fed?s estimate of potential output. Typical formulations of the rule assume that the level of the inflation-adjusted federal funds rate that is expected to prevail in the long run, sometimes thought of as the ?natural? rate of interest, is constant over time. Since this assumption is likely incorrect, we show how the Taylor rule can account for a variable natural rate by incorporating long-term productivity growth. We also show that ...