Search Results
Working Paper
Forecasting in the Absence of Precedent
We survey approaches to macroeconomic forecasting during the COVID-19 pandemic. Due to the unprecedented nature of the episode, there was greater dependence on information outside the econometric model, captured through either adjustments to the model or additional data. The transparency and flexibility of assumptions were especially important for interpreting real-time forecasts and updating forecasts as new data were observed. With data available at the time of writing, we show how various assumptions were violated and how these systematically biased forecasts.
Briefing
Examining the Differences in r* Estimates
With inflation declining over the course of the year and the Federal Open Market Committee (FOMC) seemingly in the process of normalizing policy, a key question is: What is the natural real rate of interest (denoted r*)? In this article, we will shed light on what r* means, what models are used to estimate it and what the benefits and drawbacks are for these models.
Working Paper
Bubbles and the Value of Innovation
Episodes of booming innovation coincide with intense speculation in financial markets leading to bubbles—increases in market valuations and firm creation followed by a crash. We provide a framework reproducing these facts that makes a rich set of predictions on how speculation changes both the private and social values of innovation. We confirm the theory in the universe of U.S. patents issued from 1926 through 2010. Measures based on financial market information indicate that speculation increases the private value of innovation and reduces negative spillovers to competing firms. No ...
Briefing
How Do Demographics Influence r*?
Demographic trends are evolving in the U.S. as well as globally, potentially affecting the behavior of interest rates. This includes the natural rate of interest, denoted r*. Through the lens of a simple model, we describe supply and demand channels through which these demographic trends may affect r* and show a range of estimates for the potential quantitative impact.
Briefing
How Does Trade Impact the Way GDP Growth and Inflation Comove Across Countries?
Seemingly small international trade linkages can lead to substantial spillovers across countries, going a long way in explaining the well-documented global comovement in GDP growth and inflation across countries. The spillovers come largely from indirect effects, with shocks in a foreign country not only propagating to the domestic economy directly but also cumulating through the trade network via other foreign countries. We develop and estimate a model incorporating these network effects, and we find that inflationary shocks in Europe have substantial effects on U.S. inflation and that U.S. ...
Briefing
What Drives Business Cycles?
There is no clear pattern as to whether inflation tends to rise or fall during recessions.The apparent lack of correlation masks the fact that inflation has in fact risen and fallen with GDP over individual business cycles.The inconsistent historical patterns wash out on average but suggest policymakers should use data to discern the underlying drivers of any specific business cycle.
Briefing
Macroeconomic Effects of Household Pessimism and Optimism
Survey data on households' expectations about macroeconomic outcomes reveal systematic differences from statistical (or rational) forecasts. We construct an empirical measure of these differences, which we refer to as "belief wedges." Across economic variables, such as inflation and unemployment, these belief wedges are significant and move in parallel with the business cycle. We present a theory of time-varying belief wedges that accounts for these empirical facts. Our theory provides a formal interpretation of these wedges as pessimism and optimism. Embedding the theory into a quantitative ...
Working Paper
How To Go Viral: A COVID-19 Model with Endogenously Time-Varying Parameters
This paper estimates a panel model with endogenously time-varying parameters for COVID-19 cases and deaths in U.S. states. The functional form for infections incorporates important features of epidemiological models but is flexibly parameterized to capture different trajectories of the pandemic. Daily deaths are modeled as a spike-and-slab regression on lagged cases. The paper's Bayesian estimation reveals that social distancing and testing have significant effects on the parameters. For example, a 10 percentage point increase in the positive test rate is associated with a 2 percentage point ...
Discussion Paper
Forecasting the COVID-19 Pandemic in the Fifth District
How many COVID-19 cases will there be in the coming days and months? While the Fifth District appears to be past the peak number of daily cases, a wide range of future outcomes is still possible.
Briefing
What Does Sectoral Inflation Tell Us About the Aggregate Trend in Inflation?
To know the appropriate stance of monetary policy, policymakers need to determine the overall trend in inflation. This is challenging in the face of varied and evolving patterns in inflation across sectors. We describe a multisector statistical model that provides a systematic approach to appropriately weight incoming inflation data from each sector. By flexibly applying time-varying weights to different sectors, this model adjusts to changing patterns in these sectors over time — including during the pandemic — and suggests that trend inflation is lower than might be suggested by the ...