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Working Paper
A New Way to Quantify the Effect of Uncertainty
Throckmorton, Nathaniel A.; Richter, Alexander W. (2017-05-04)
This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step allows us to decompose the exogenous and endogenous sources of uncertainty, calculate the effect of volatility following the cost of business cycles literature, and generate data-driven policy functions for any higherorder moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante ...
Working Papers , Paper 1705

Report
The great escape? A quantitative evaluation of the Fed’s liquidity facilities
Eggertsson, Gauti B.; Del Negro, Marco; Kiyotaki, Nobuhiro; Ferrero, Andrea (2011)
We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities ...
Staff Reports , Paper 520

Working Paper
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit
Gagnon, Etienne; Vilan, Diego; Trevino, James; Chung, Hess T.; Nakata, Taisuke; Paustian, Matthias; Zheng, Wei; Schlusche, Bernd (2019-02-01)
We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in ...
Finance and Economics Discussion Series , Paper 2019-003

Working Paper
How to Starve the Beast: Fiscal Policy Rules
Martin, Fernando M. (2023-08-08)
Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of expenditure, revenue, budget balance and debt rules when governments are discretionary and prone to overspending. The optimal prescription is either an expenditure ceiling or a combination of revenue and primary deficit ceilings. Most of the benefits can still be reaped with constraints looser than optimal or escape clauses during adverse times. When imposed on their own, revenue ceilings are only mildly ...
Working Papers , Paper 2019-026

Report
A model of the federal funds market: yesterday, today, and tomorrow
Lester, Benjamin; Afonso, Gara; Armenter, Roc (2018-02-01)
The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before ...
Staff Reports , Paper 840

Working Paper
Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge
Martínez García, Enrique; Duncan, Roberto; Miller, Luke (2026-06)
In August 2020, the Federal Reserve adopted Flexible Average Inflation Targeting (FAIT), permitting inflation to temporarily exceed the 2% target. Using synthetic control methods, we estimate that FAIT raised headline CPI inflation by 1 percentage point and core CPI by 0.5 percentage points, relative to a no-FAIT-adoption counterfactual, with short-lived effects concentrated during the 2021 inflation surge. Short-term inflation expectations increased by 0.8 percentage points, while long-term expectations remained well anchored. Real economic effects were statistically insignificant. The ...
Working Papers , Paper 2511

Discussion Paper
Does the Equity Term Structure Respond to Monetary Policy Shocks?
Dyer, Henry; Jankauskas, Tomas (2026-08-12)
A long-standing body of research, inspired by Bernanke and Kuttner (2005), has documented the effects of Fed interest rate surprises on stock markets. While stock markets provide valuable information about the investor risk premium and dividend growth expectations, researchers have only recently developed more comprehensive tools to estimate the term structure of equity risk premia and dividend growth expectations across a broad range of maturities. In this post, we investigate the impact of monetary policy surprises (or shocks) on short- and long-term estimates of risk premia and growth ...
Liberty Street Economics , Paper 20260812

Working Paper
The Role of Inflation Perceptions in Consumer Inflation Expectations: Evidence from the Euro Area
Bussière, Matthieu; Gilbert, Johanna; Grishchenko, Olesya V. (2026-06-03)
Using data on euro-area household inflation forecasts from the European Commission Consumer Survey, we show that households' perceptions of recent price changes play a key role in the formation of their inflation expectations. Such a relationship remains robust when we account for specific inflation components, household characteristics, and macroeconomic conditions, even though the perceptions-expectations relationship is heterogeneous across countries. These results highlight the importance of perceptions about inflation for the conduct of monetary policy.
Finance and Economics Discussion Series , Paper 2026-038

Working Paper
Relative Price Shocks and Inflation
Ruge-Mucia, Francisco J.; Wolman, Alexander L. (2022-05)
Inflation is determined by interaction between real factors and monetary policy. Among the most important real factors are shocks to the supply and demand for different components of the consumption basket. We use an estimated multi-sector New Keynesian model to decompose the behavior of U.S. inflation into contributions from sectoral (or "relative price") shocks, monetary policy shocks, and aggregate real shocks. The model is estimated by maximum likelihood with U.S. data for the post-1994 period in which inflation and the monetary policy regime appeared to be stable. In addition to ...
Working Paper , Paper 22-07

Working Paper
Monetary Policy Implementation with an Ample Supply of Reserves
Potter, Simon M.; Schulhofer-Wohl, Sam; Afonso, Gara; Martin, Antoine; Nosal, Ed; Kim, Kyungmin (2020-01-02)
Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007–09 financial crisis. We find that the optimal level of reserve supply ...
FRB Atlanta Working Paper , Paper 2020-2

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