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Working Paper
DECLINING TRENDS IN THE REAL INTEREST RATE AND INFLATION: THE ROLE OF AGING
This paper explores a causal link between aging of the labor force and declining trends in the real interest rate and inflation in Japan. We develop a New Keynesian search/matching model that features heterogeneities in age and firm-specific skills. Using the model, we examine the long-run implications of the sharp drop in labor force entry in the 1970s. We show that the changes in the demographic structure induce significant low-frequency movements in per-capita consumption growth and the real interest rate. They also lead to similar movements in the inflation rate when the monetary policy ...
Working Paper
Lessons for forecasting unemployment in the United States: use flow rates, mind the trend
This paper evaluates the ability of autoregressive models, professional forecasters, and models that incorporate unemployment flows to forecast the unemployment rate. We pay particular attention to flows-based approaches?the more reduced-form approach of Barnichon and Nekarda (2012) and the more structural method in Tasci (2012)?to generalize whether data on unemployment flows are useful in forecasting the unemployment rate. We find that any approach that considers unemployment inflow and outflow rates performs well in the near term. Over longer forecast horizons, Tasci (2012) appears to be a ...
Working Paper
A Unified Framework to Estimate Macroeconomic Stars
We develop a flexible semi-structural time-series model to estimate jointly several macroeconomic "stars" -- i.e., unobserved long-run equilibrium levels of output (and growth rate of output), the unemployment rate, the real rate of interest, productivity growth, price inflation, and wage inflation. The ingredients of the model are in part motivated by economic theory and in part by the empirical features necessitated by the changing economic environment. Following the recent literature on inflation and interest rate modeling, we explicitly model the links between long-run survey expectations ...
Working Paper
All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy
The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in ...
Working Paper
Hitting the Elusive Inflation Target
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
News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact
We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper ...
Working Paper
A Unified Framework to Estimate Macroeconomic Stars
We develop a flexible semi-structural time-series model to estimate jointly several macroeconomic "stars" — i.e., unobserved long-run equilibrium levels of output (and growth rate of output), the unemployment rate, the real rate of interest, productivity growth, the price inflation, and wage inflation. The ingredients of the model are in part motivated by economic theory and in part by the empirical features necessitated by the changing economic environment. Following the recent literature on inflation and interest rate modeling, we explicitly model the links between long-run survey ...
Working Paper
Longer-Run Economic Consequences of Pandemics
How do major pandemics affect economic activity in the medium to longer term? Is it consistent with what economic theory prescribes? Since these are rare events, historical evidence over many centuries is required. We study rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. In addition, we include major armed conflicts resulting in a similarly large death toll. Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In ...
Working Paper
A Unified Framework to Estimate Macroeconomic Stars
This paper develops a semi-structural model to jointly estimate “stars” — long-run levels of output (its growth rate), the unemployment rate, the real interest rate, productivity growth, price inflation, and wage inflation. It features links between survey expectations and stars, time-variation in macroeconomic relationships, and stochastic volatility. Survey data help discipline stars’ estimates and have been crucial in estimating a high-dimensional model since the pandemic. The model has desirable real-time properties, competitive forecasting performance, and superior fit to the ...