Search Results
Discussion Paper
Oil, Equities, and a "Nonbinding" Zero Lower Bound: The Monetary Policy Response to COVID-19
We analyze the recent behavior of oil and equity prices in the context of our earlier work, Datta, et al. (2021), which focuses on the previous zero lower bound (ZLB) episode, in the aftermath of the Global Financial Crisis. We find that the correlation between oil and equity returns and the responsiveness of these returns to macroeconomic surprises are perhaps elevated relative to normal times but somewhat moderated relative to the previous ZLB episode.
Working Paper
Understanding the New Normal : The Role of Demographics
Since the onset of the Great Recession, the U.S. economy has experienced low real GDP growth and low real interest rates, including for long maturities. We show that these developments were largely predictable by calibrating an overlapping-generation model with a rich demographic structure to observed and projected changes in U.S. population, family composition, life expectancy, and labor market activity. The model accounts for a 1?percentage point decline in both real GDP growth and the equilibrium real interest rate since 1980?essentially all of the permanent declines in those variables ...
Working Paper
Oil, Equities, and the Zero Lower Bound
From late 2008 to 2017, oil and equity returns were more positively correlated than in other periods. In addition, we show that both oil and equity returns became more responsive to macroeconomic news. We provide empirical evidence and theoretical justification that these changes resulted from nominal interest rates being constrained by the zero lower bound (ZLB). Although the ZLB alters the economic environment in theory, supportive empirical evidence has been lacking. Our paper provides clear evidence of the ZLB altering the economic environment, with implications for the effectiveness of ...
Working Paper
Monetary Policy, Incomplete Information, and the Zero Lower Bound
In the context of a stylized New Keynesian model, we explore the interaction between imperfect knowledge about the state of the economy and the zero lower bound. We show that optimal policy under discretion near the zero lower bound responds to signals about an increase in the equilibrium real interest rate by less than it would when far from the zero lower bound. In addition, we show that Taylor-type rules that either include a time-varying intercept that moves with perceived changes in the equilibrium real rate or that respond aggressively to deviations of inflation and output from their ...
Working Paper
Monetary Policy and the Predictability of Nominal Exchange Rates
This paper documents two facts about countries with floating exchange rates where monetary policy controls inflation using a short-term interest rate. First, the current real exchange rate predicts future changes in the nominal exchange rate at horizons greater than two years both in sample and out of sample. This predictability improves with the length of the horizon. Second, the real exchange rate is virtually uncorrelated with future inflation rates both in the short run and in the long run. We show that a large class of open-economy models is consistent with these findings and that, ...
Discussion Paper
The Neutral Rate and the Summary of Economic Projections
This note uses information provided in the quarterly Summary of Economic Projections (SEP) of FOMC meeting participants to extract estimates of the neutral federal funds rate--defined as the value of the federal funds rate that is "neither expansionary nor contractionary if the economy were operating near its potential"--in the short and longer run.
Working Paper
Are long-run inflation expectations anchored more firmly in the Euro area than in the United States?
This paper compares the recent evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well-anchored in both economies, but also reveal substantially greater dispersion across forecasters' long-horizon projections of U.S. inflation. Daily data on inflation swaps and nominal-indexed bond spreads--which gauge compensation for expected inflation and inflation risk--also suggest that long-run inflation expectations are ...
Working Paper
When are the Effects of Fiscal Policy Uncertainty Large?
Using a new-Keynesian model with endogenous capital accumulation, I show that uncertainty about fiscal policy can cause large declines in consumption, investment, and output when the zero lower bound (ZLB) binds, but has modest effects when the monetary authority is not constrained by the ZLB. I study uncertainty about the level of government spending and uncertainty about tax rates on consumption, wages, capital income, and investment. In my model, uncertainty about government spending and the wage tax rate has particularly large effects. I show that the effects of fiscal policy uncertainty ...
Working Paper
Bias in Local Projections
Local projections (LPs) are a popular tool in applied macroeconomic research. We survey the related literature and find that LPs are often used with very small samples in the time dimension. With small sample sizes, given the high degree of persistence in most macroeconomic data, impulse responses estimated by LPs can be severely biased. This is true even if the right-hand-side variable in the LP is iid, or if the data set includes a large cross-section (i.e., panel data). We derive a simple expression to elucidate the source of the bias. Our expression highlights the interdependence between ...
Discussion Paper
The Expected Real Interest Rate in the Long Run : Time Series Evidence with the Effective Lower Bound
In response to the global financial crisis, the Federal Open Market Committee lowered the target for the federal funds rate to a range of 0 to 25 basis points in December 2008, and maintained that target range until the end of 2015. Over that same period, longer-term interest rates in the United States were at historically low levels.