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Working Paper
Hitting the Elusive Inflation Target
Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias (2019-08-30)
Since the 2001 recession, average core inflation has been below the Federal Reserve?s 2% target. This deflationary bias is a predictable consequence of a low nominal interest rates environment in which the central bank follows a symmetric strategy to stabilize inflation. The deflationary bias increases if macroeconomic uncertainty rises or the natural real interest rate falls. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias and allows inflation to converge to the central bank?s target. We show that adopting this ...
Working Paper Series , Paper WP-2019-7

Report
Comparing forecast-based and backward-looking Taylor rules: a "global" analysis
Eusepi, Stefano (2005-01-01)
This paper examines the performance of forecast-based nonlinear Taylor rules in a class of simple microfunded models. The paper shows that even if the policy rule leads to a locally determinate (and stable) inflation target, there exist other learnable "global" equilibria such as cycles and sunspots. Moreover, under learning dynamics, the economy can fall into a liquidity trap. By contrast, more backward-looking and "active" Taylor rules guarantee that the unique learnable equilibrium is the inflation target. This result is robust to different specifications of the role of money, price ...
Staff Reports , Paper 198

Working Paper
Interest Rate Surprises: A Tale of Two Shocks
Nunes, Ricardo; Ozdagli, Ali K.; Tang, Jenny (2022-01-01)
Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our ...
Working Papers , Paper 22-2

Discussion Paper
Looking Back at 10 Years of Liberty Street Economics
Hirtle, Beverly (2021-03-19)
This month the Liberty Street Economics blog is celebrating its tenth anniversary. We first welcomed readers to Liberty Street on March 21, 2011 and since then our annual page views have grown from just over 260,000 to more than 3.3 million.
Liberty Street Economics , Paper 20210319

Working Paper
The Role of Dispersed Information in Pricing Default: Evidence from the Great Recession
Macchiavelli, Marco; Brancati, Emanuele (2015-08-13)
The recent Global Games literature makes important predictions on how financial crises unfold. We test the empirical relevance of these theories by analyzing how dispersed information affects banks' default risk. We find evidence that precise information acts as a coordination device which reduces creditors' willingness to roll over debt to a bank, thus increasing both its default risk and its vulnerability to changes in expectations. We establish two new results. First, given an unfavorable median forecast, less dispersed beliefs greatly increase default risk; this is consistent with ...
Finance and Economics Discussion Series , Paper 2015-79

Working Paper
A Theory of Sticky Rents: Search and Bargaining with Incomplete Information
Verbrugge, Randal; Gallin, Joshua H. (2017-05-05)
The housing rental market offers a unique laboratory for studying price stickiness. This paper is motivated by two facts: 1. Tenants? rents are remarkably sticky even though regular and expected recontracting would, by itself, suggest substantial rent flexibility. 2. Rent stickiness varies significantly across structure type; for example, detached unit rents are far stickier than large apartment unit rents. We offer the first theoretical explanation of rent stickiness that is consistent with these facts. In this theory, search and bargaining with incomplete information generates stickiness in ...
Working Papers (Old Series) , Paper 1705

Working Paper
Escaping the Great Recession
Melosi, Leonardo; Bianchi, Francesco (2014-08-01)
While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers? behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short ...
Working Paper Series , Paper WP-2014-17

Working Paper
Mechanics of Linear Quadratic Gaussian Rational Inattention Tracking Problems
Fulton, Chad (2017-11-03)
This paper presents a general framework for constructing and solving the multivariate static linear quadratic Gaussian (LQG) rational inattention tracking problem. We interpret the nature of the solution and the implied action of the agent, and we construct representations that formalize how the agent processes data. We apply this infrastructure to the rational inattention price-setting problem, confirming the result that a conditional response to economics shocks is possible, but casting doubt on a common assumption made in the literature. We show that multiple equilibria and a social cost ...
Finance and Economics Discussion Series , Paper 2017-109

Working Paper
Intermediation in Markets for Goods and Markets for Assets
Nosal, Ed; Wright, Randall; Wong, Yuet-Yee (2019-03-01)
We analyze agents' decisions to act as producers or intermediaries using equilibrium search theory. Extending previous analyses in various ways, we ask when intermediation emerges and study its efficiency. In one version of the framework, meant to resemble retail, middlemen hold goods, which entails (storage) costs; that model always displays uniqueness and simple transition dynamics. In another version, middlemen hold assets, which entails negative costs, that is, positive returns; that model can have multiple equilibria and complicated belief-based dynamics. These results are consistent ...
FRB Atlanta Working Paper , Paper 2019-5

Working Paper
Constrained Discretion and Central Bank Transparency
Bianchi, Francesco; Melosi, Leonardo (2016-10-16)
We develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents? uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that ...
Working Paper Series , Paper WP-2016-15

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