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Working Paper
Federal Reserve transparency and financial market forecasts of short-term interest rates
The 1990s and early 2000s witnessed an unprecedented increase in central bank transparency around the world, yet there has been little empirical work that convincingly demonstrates any economic benefits of increased central bank transparency. This paper shows that, since the late 1980s, U.S, financial markets and private sector forecasters have become: 1) better able to forecast the federal funds rate at horizons out to several months, 2) less surprised by Federal Reserve announcements, 3) more certain of their interest rate forecasts ex ante, as measured by interest rate options, and 4) less ...
Journal Article
Macroeconomic implications of changes in the term premium
Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. This paper investigates these implications using both a structural model and a reduced-form framework. The authors show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the ...
Working Paper
Let’s twist again: a high-frequency event-study analysis of operation twist and its implications for QE2
This paper undertakes a modern event-study analysis of Operation Twist and compares its effects to those that should be expected for the recent quantitative policy announced by the Federal Reserve, dubbed "QE2". We first show that Operation Twist and QE2 are similar in magnitude. We identify six significant, discrete announcements in the course of Operation Twist that potentially could have had a major effect on financial markets, and show that four did have statistically significant effects. The cumulative effect of these six announcements on longer-term Treasury yields is highly ...
Conference Paper
Future prices as risk-adjusted forecasts of monetary policy
Many researchers have used federal funds futures rates as measures of financial markets? expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment for risk premia. In this paper, we document that excess returns on federal funds futures have been positive on average. We also document that expected excess returns are strongly countercyclical. In particular, excess returns are surprisingly predictable by employment growth and other business-cycle indicators such as Treasury yields and corporate bond ...
Working Paper
Futures prices as risk-adjusted forecasts of monetary policy
Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess ...
Journal Article
Inflation targeting and the anchoring of inflation expectations in the western hemisphere
We investigate the extent to which long-run inflation expectations are well anchored in three Western Hemisphere countries - Canada, Chile, and the United States - using a high-frequency event-study analysis. Specifically, we use daily data on far-ahead forward inflation compensation - the difference between forward rates on nominal and inflation-indexed bonds - as an indicator of financial market perceptions of inflation risk and the expected level of inflation at long horizons. For the United States, we find that far-ahead forward inflation compensation has reacted significantly to ...
Working Paper
Real wage cyclicality in the PSID
Previous studies of real wage cyclicality have made only sparing use of the microdata detail that is available in the Panel Study of Income Dynamics (PSID). The present paper brings to bear this additional detail to investigate the robustness of previous results and to examine whether there are important cross-sectional and demographic differences in wage cyclicality. Although real wages were procyclical across the entire distribution of workers from 1967 to 1991, the wages of lower-income, younger, and less-educated workers exhibited greater procyclicality. However, workers' straight-time ...
Journal Article
Would an inflation target help anchor U.S. inflation expectations?
Since the October 2005 nomination of Ben Bernanke to become Chairman of the Federal Reserve Board, there has been increasing speculation in the financial press that the Federal Open Market Committee (FOMC) might soon adopt an explicit numerical objective for inflation. However, skeptics of inflation targeting have maintained that this would constrain the FOMC and might provide little benefit in return?after all, it has been argued, haven't inflation expectations in the U.S. been well anchored since the early to mid-1990s? ; In this Economic Letter, I discuss recent research on whether ...
Journal Article
Structural and cyclical economic factors
The recent recession and recovery raise important questions about the relative weight of structural and cyclical factors in the economy. A recent San Francisco Federal Reserve Bank conference explored the extent to which different economic variables behaved in a standard cyclical fashion during this episode or were scarred in a more permanent, structural manner. Both cyclical and structural effects appear evident in the recession, suggesting that some features of the U.S. economy can benefit from stimulatory monetary and fiscal policy, while others are more permanently damaged and unlikely to ...
Working Paper
Higher-Order Perturbation Solutions to Dynamic, Discrete-Time Rational Expectations Models
We present an algorithm and software routines for computing nth order Taylor series approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. The primary advantage of higher-order (as opposed to first- or second-order) approximations is that they are valid not just locally, but often globally (i.e., over nonlocal, possibly very large compact sets) in a rigorous sense that we specify. We apply our routines to compute first- through seventh-order approximate solutions to two standard macroeconomic models, a stochastic growth model and a ...