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Working Paper
Forecasting U.S. Economic Activity with a Small Information Set
We provide a parsimonious setup for forecasting U.S. GDP growth and the unemployment rate based on a few fundamental drivers. This setup yields forecasts that are reasonably accurate compared with private-sector and Federal Reserve forecasts over the 1984–2019 and post COVID-19 pandemic periods. This result is achieved by jointly estimating the processes for GDP growth and the unemployment rate, with the constraint that GDP and unemployment follow Okun’s law in first differences. This setup can be easily extended to replace the variables in the information set with factors that might ...
Report
Predicting Recessions Using the Yield Curve: The Role of the Stance of Monetary Policy
The yield curve is often viewed as a leading indicator of recessions. While the yield curve’s predictive power is not without controversy, its ability to anticipate economic downturns endures across specifications and time periods. This note examines the predictive power of the yield curve after accounting for the current stance of monetary policy—a relevant issue given that monetary policy was unusually accommodative during the most recent yield curve inversion, in the third quarter of 2019. The results show that a yield curve inversion likely overstates the probability of a recession ...
Working Paper
Estimation of forward-looking relationships in closed form: an application to the New Keynesian Phillips curve
We illustrate the importance of placing model-consistent restrictions on expectations in the estimation of forward-looking Euler equations. In two-stage limited-information settings where first-stage estimates are used to proxy for expectations, parameter estimates can differ substantially, depending on whether these restrictions are imposed or not. This is shown in an application to the New Keynesian Phillips Curve (NKPC), first in a Monte Carlo exercise, and then on actual data. The closed-form (CF) estimates require by construction that expectations of inflation be model-consistent at all ...
Working Paper
Inflation dynamics when inflation is near zero
This paper discusses the likely evolution of U.S. inflation in the near and medium term on the basis of (1) past U.S. experience with very low levels of inflation, (2) the most recent Japanese experience with deflation, and (3) recent U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and ...
Journal Article
Why the interest in reforming the International Monetary System?
The recent spate of severe financial crises has provoked an interest in international monetary reform not seen since the breakdown of the fixed exchange rate system 30 years ago. Indeed, the crises have forced both academic economists and policymakers to question some of their most basic assumptions about the appropriate design of the international monetary system. This article was the introductory paper at the Federal Reserve Bank of Boston's conference on "Rethinking the International Monetary System," held in June 1999. The article reviews recent changes in the economic environment that ...
Briefing
The estimated macroeconomic effects of the Federal Reserve's large-scale Treasury purchase program
This brief examines an issue of current importance to the conduct of U.S. economic policy: how has the Federal Open Market Committee (FOMC) plan to purchase up to $600 billion of Treasury securities by June 30, 2011 affected the movement of inflation, GDP, and employment to more desirable medium-term and long-term levels? Following the FOMC's announcement of the plan on November 3, 2010, other events that potentially influence Treasury yields have been at play. To estimate the effects that the FOMC Treasury purchases may have on the goal of achieving more desirable levels of inflation and ...
Briefing
The role of expectations and output in the inflation process: an empirical assessment
This brief examines two issues of current interest concerning inflation: (1) whether "well-anchored" expectations will help to restrain inflation's decline and whether an "un-anchoring" of expectations could lead to undesirably high inflation and (2) to what extent output (or utilization) gaps are useful components of empirical models of inflation and, if they are useful, to what extent current gaps might counterbalance the effect of expectations on inflation. The goals of conducting this examination are to articulate a reasonably coherent framework for the discussion, highlight the ...
Journal Article
Norway's approach to monetary policy
The goal of monetary policy as conducted by Norges Bank is to maintain low and stable inflation. The operational target of monetary policy is explicitly defined in a consumer price inflation rate of approximately 2.5 percent over time. Norges Bank sets its interest rate instrument with a view to achieving the inflation target over a two-year horizon, and it will normally tolerate deviations of actual inflation from target that are not in excess of plus or minus 1 percentage point. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties, ...
Working Paper
A response to Cogley and Sbordone's comment on “Closed-Form Estimates of the New Keynesian Phillips Curve with Time-Varying Trend Inflation”
In their 2010 comment (which we refer to as CS10), Cogley and Sbordone argue that: (1) our estimates are not entirely closed form, and hence are arbitrary; (2) we cannot guarantee that our estimates are valid, while their estimates (Cogley and Sbordone 2008, henceforth CS08) always are; and (3) the estimates in CS08, in terms of goodness of fit, are just as good as other, much different estimates in our paper. We show in this reply that the exact closed-form estimates are virtually the same as the "quasi" closed-form estimates. Our estimates are consistent with the implicit assumptions ...