Search Results
Working Paper
Inflation and Deflationary Biases in Inflation Expectations
We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that an inflation bias as well as a deflationary bias exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present (and sizable) in inflation ...
Report
How to escape a liquidity trap with interest rate rules
I study how central banks should communicate monetary policy in liquidity trap scenarios in which the zero lower bound on nominal interest rates is binding. Using a standard New Keynesian model, I argue that the key to anchoring expectations and preventing self-fulfilling deflationary spirals is to promise to keep nominal interest rates pegged at zero for a length of time that depends on the state of the economy. I derive necessary and sufficient conditions for this type of state-contingent forward guidance to implement the welfare-maximizing equilibrium as a globally determinate (that is, ...
Speech
Living Life Near the ZLB
Remarks at 2019 Annual Meeting of the Central Bank Research Association (CEBRA), New York City.
Report
An interest rate rule to uniquely implement the optimal equilibrium in a liquidity trap
We propose a new interest rate rule that implements the optimal equilibrium and eliminates all indeterminacy in a canonical New Keynesian model in which the zero lower bound on nominal interest rates (ZLB) is binding. The rule commits to zero nominal interest rates for a length of time that increases in proportion to how much past inflation has deviated?either upward or downward?from its optimal level. Once outside the ZLB, interest rates follow a standard Taylor rule. Following the Taylor principle outside the ZLB is neither necessary nor sufficient to ensure uniqueness of equilibria. ...
Speech
Is there room for more monetary cooperation?: panel discussion remarks at the Global Financial Stability in a New Monetary Environment conference, Paris, France
Panel discussion remarks at the Global Financial Stability in a New Monetary Environment conference, Paris, France.
Working Paper
Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints
We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly ...
Speech
Concluding remarks at the Monetary Policy Implementation in the Long Run Conference, Federal Reserve Bank of Minneapolis
Remarks at the Monetary Policy Implementation in the Long Run Conference, Federal Reserve Bank of Minneapolis, Minneapolis, Minnesota.
Journal Article
The Zero Lower Bound Remains a Medium-Term Risk
Financial markets—specifically derivatives—contain information about the range of probable future short-term interest rates. The information from this statistical distribution can help measure the perceived risk of interest rates returning to the zero lower bound in the future. The risk varies over time, driven mainly by the expected level of interest rates. At longer forecast horizons, a higher risk of returning to the lower bound primarily reflects a higher amount of uncertainty. Currently, the perceived risk appears slim over the next few years but is significant at longer horizons.
Working Paper
Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory
In the aftermath of the Great Recession, many countries used low or negative policy rates to stimulate the economy. These policies gave rise to a rapidly growing literature that seeks to understand and quantify their impact. A fundamental step when studying the effectiveness of low and negative policy rates is to understand their transmission to loan and deposit rates. This paper proposes two models of pass-through from policy rates to loan and deposit rates that can match important stylized facts while remaining parsimonious. These models can be used to study the transition between positive ...
Speech
Money markets after liftoff: assessment to date and the road ahead
Remarks at the 70th Anniversary Celebration of the School of International and Public Affairs at Columbia University, New York City.