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Working Paper
Minimal state variable solutions to Markov-switching rational expectations models
Zha, Tao; Waggoner, Daniel F.; Farmer, Roger E. A. (2008)
We develop a new method for computing minimal state variable solutions (MSV) to Markov-switching rational expectations models. We provide an algorithm to compute an MSV solution and show how to test a given solution for uniqueness and boundedness. We construct an example that is calibrated to U.S. data and show that the MSV solution in our example is unique. This solution can potentially explain in three different ways the observed reduction in the variance of inflation and the interest rate after 1980: The policy rule might have changed, the variance of the fundamental shocks might have ...
FRB Atlanta Working Paper , Paper 2008-23

Working Paper
Land-price dynamics and macroeconomic fluctuations
Zha, Tao; Wang, Pengfei; Liu, Zheng (2011)
We argue that positive comovements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the comovements by incorporating two key features into a DSGE model: we introduce land as a collateral asset in firms' credit constraints, and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations ...
FRB Atlanta Working Paper , Paper 2011-11

Working Paper
Land Prices and Unemployment
Zha, Tao; Miao, Jianjun; Liu, Zheng (2013)
We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase of the ...
Working Paper Series , Paper 2013-22

Working Paper
Bayesian methods for dynamic multivariate models
Sims, Christopher A.; Zha, Tao (1996)
If multivariate dynamic models are to be used to guide decision-making, it is important that it be possible to provide probability assessments of their results. Bayesian VAR models in the existing literature have not commonly (in fact, not at all as far as we know) been presented with error bands around forecasts or policy projections based on the posterior distribution. In this paper we show that it is possible to introduce prior information in both reduced form and structural VAR models without introducing substantial new computational burdens. With our approach, identified VAR analysis of ...
FRB Atlanta Working Paper , Paper 96-13

Working Paper
Understanding the New Keynesian model when monetary policy switches regimes
Zha, Tao; Waggoner, Daniel F.; Farmer, Roger E. A. (2007)
This paper studies a New Keynesian model in which monetary policy may switch between regimes. We derive sufficient conditions for indeterminacy that are easy to implement and we show that the necessary and sufficient condition for determinacy, provided by Davig and Leeper, is necessary but not sufficient. More importantly, we use a two-regime model to show that indeterminacy in a passive regime may spill over to an active regime no matter how active the latter regime is. As a result, a passive monetary policy is more damaging than has been previously thought. Our results imply that the ...
FRB Atlanta Working Paper , Paper 2007-12

Working Paper
Shocks and government beliefs: the rise and fall of American inflation
Williams, Noah; Zha, Tao; Sargent, Thomas J. (2004)
The authors use a Bayesian Markov chain Monte Carlo algorithm to estimate a model that allows temporary gaps between a true expectational Phillips curve and the monetary authority?s approximating nonexpectational Phillips curve. A dynamic programming problem implies that the monetary authority?s inflation target evolves as its estimated Phillips curve moves. The authors? estimates attribute the rise and fall of post-World War II inflation in the United States to an intricate interaction between the monetary authority?s beliefs and economic shocks. Shocks in the 1970s altered the monetary ...
FRB Atlanta Working Paper , Paper 2004-22

Working Paper
What we learn from China's rising shadow banking: exploring the nexus of monetary tightening and banks' role in entrusted lending
Chen, Kaiji; Ren, Jue; Zha, Tao (2016-01-01)
We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance ...
FRB Atlanta Working Paper , Paper 2016-1

Working Paper
Stock-Bond Return Correlation, Bond Risk Premium Fundamentals, and Fiscal-Monetary Policy Regime
Li, Erica X.N.; Zha, Tao; Zhang, Ji; Zhou, Hao (2020-10-02)
We incorporate regime switching between monetary and fiscal policies in a general equilibrium model to explain three stylized facts: (1) the positive stock-bond return correlation from 1971 to 2000 and the negative one after 2000, (2) the negative correlation between consumption and inflation from 1971 to 2000 and the positive one after 2000, and (3) the coexistence of positive bond risk premiums and the negative stock-bond return correlation. We show that two distinctive shocks—the technology and investment shocks—drive positive and negative stock-bond return correlations under two ...
FRB Atlanta Working Paper , Paper 2020-19

Working Paper
Four Stylized Facts about COVID-19
Kopecky, Karen A.; Zha, Tao; Atkeson, Andrew (2020-08-26)
We document four facts about the worldwide COVID-19 pandemic that are relevant for those studying the impact of nonpharmaceutical interventions (NPIs) on COVID-19 transmission. First, across all countries and U.S. states that we study, the growth rates of daily deaths from COVID-19 fell from a wide range of initially high levels to levels close to zero within 20–30 days after each region experienced 25 cumulative deaths. Second, after this initial period, growth rates of daily deaths have hovered around zero or below everywhere in the world. Third, the cross section standard deviation of ...
FRB Atlanta Working Paper , Paper 2020-15

Working Paper
Asymmetric expectation effects of regime shifts and the Great Moderation
Zha, Tao; Waggoner, Daniel F.; Liu, Zheng (2007)
We assess the quantitative importance of the expectation effects of regime shifts in monetary policy in a DSGE model that allows the monetary policy rule to switch between a ?bad? regime and a ?good? regime. When agents take into account such regime shifts in forming expectations, the expectation effect is asymmetric across regimes. In the good regime, the expectation effect is small despite agents? disbelief that the regime will last forever. In the bad regime, however, the expectation effect on equilibrium dynamics of inflation and output is quantitatively important, even if agents put a ...
Working Papers , Paper 653

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