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Working Paper
The Risk-Adjusted Monetary Policy Rule
Schmidt, Sebastian; Nakata, Taisuke (2016-07)
Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation---the rate to which inflation will eventually converge---which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted ...
Finance and Economics Discussion Series , Paper 2016-061

Speech
Bullard Discusses Monetary Policy and Inflation Outlook with Bloomberg
Bullard, James B. (2020-09-21)
St. Louis Fed President James Bullard discussed the Federal Open Market Committee’s flexible average inflation targeting approach and why he thinks inflation may move higher in the near term. He spoke during an appearance on “Bloomberg Daybreak: Australia.”
Speech

Speech
Monetary policy strategies for a low-neutral-interest-rate world: remarks at the 80th Plenary Meeting of the Group of Thirty, Federal Reserve Bank of New York, New York City
Williams, John C. (2018-11-30)
Remarks at the 80th Plenary Meeting of the Group of Thirty, Federal Reserve Bank of New York, New York City.
Speech , Paper 303

Working Paper
Gradualism and Liquidity Traps
Schmidt, Sebastian; Nakata, Taisuke (2016-11)
Modifying the objective function of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy in which large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with an interest-rate smoothing objective credibly keeps the policy rate low for longer than the central bank with the standard objective function. Through expectations, the temporary overheating of the economy associated with such a low-for-long interest rate policy mitigates the declines in inflation ...
Finance and Economics Discussion Series , Paper 2016-092

Working Paper
Average Inflation Targeting and Household Expectations
Coibion, Olivier; Knotek, Edward S.; Gorodnichenko, Yuriy (2021-12-20)
Using a daily survey of U.S. households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days. Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed’s new strategy than others, nor ...
Working Papers , Paper 20-26R

Journal Article
Evaluating Monetary Policy with Inflation Bands and Horizons
Davig, Troy A.; Foerster, Andrew (2023-02-21)
Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.
FRBSF Economic Letter , Volume 2023 , Issue 05 , Pages 6

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
Monetary Policy and Durable Goods
House, Christopher L.; Kimball, Miles; Boehm, Christoph E.; Barsky, Robert (2016-11-06)
We analyze monetary policy in a New Keynesian model with durable and nondurable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known ?divine coincidence.? In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation ...
Working Paper Series , Paper WP-2016-18

Working Paper
Conservatism and Liquidity Traps
Schmidt, Sebastian; Nakata, Taisuke (2014-11-12)
Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB ...
Finance and Economics Discussion Series , Paper 2014-105

Working Paper
Monetary policy in a forward-looking input-output economy
Strum, Brad E. (2008)
This paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a New Keynesian model. Both optimal policy under commitment and discretionary policy, which is the minimization of a simple loss function, are studied. Consumer utility losses under alternative simple loss functions are compared, including their robustness to model and shock misperceptions, and parameter uncertainty. Targeting inflation in both consumer and intermediate goods performs better than targeting a single price index; price-level targeting of both consumer and ...
Finance and Economics Discussion Series , Paper 2008-33

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