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Working Paper
Which Output Gap Estimates Are Stable in Real Time and Why?
Output gaps that are estimated in real time can differ substantially from those estimated after the fact. We aim to understand the real-time instability of output gap estimates by comparing a suite of reduced-form models. We propose a new statistical decomposition and find that including a Okun’s law relationship improves real-time stability by alleviating the end-point problem. Models that include the unemployment rate also produce output gaps with relevant economic content. However, we find that no model of the output gap is clearly superior to the others along each metric we consider.
Working Paper
Assessing the Effects of the Zero-Interest-Rate Policy through the Lens of a Regime-Switching DSGE Model
Standard dynamic stochastic general equilibrium (DSGE) models assume a Taylor rule and forecast an increase in interest rates immediately after the 2007-2009 economic recession given the predicted output and inflation, contradictory to the extended period of near-zero interest rate policy (ZIRP) conducted by the Federal Reserve. In this paper, I study two methods of modeling the ZIRP in DSGE models: the perfect foresight rational expectations model and the Markov regime-switching model, which I develop in this paper. In this regime-switching model, I assume that, in one regime, the policy ...
Report
The macroeconomic effects of large-scale asset purchase programs
The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the Federal Reserve?s second large-scale asset purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on U.S. data. Our simulations suggest that such a program increases GDP growth by less than half a percentage point, although the effect on the level of GDP is very persistent. The program?s marginal contribution to inflation is very small. One key reason for our findings is that we estimate a small ...
Working Paper
The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets
This paper develops a model of the financial system that provides a framework for analyzing monetary policy implementation in a world with multiple Federal Reserve liabilities and a superabundant supply of reserves. The analysis demonstrates that the Federal Reserve's suite of policy tools including interest on excess reserves (IOER), overnight and term reverse repurchase agreements, and term deposits should allow the Federal Reserve to raise the level of short-term interest rates at the appropriate time. The model also demonstrates that these tools could be used in different ways to achieve ...
Discussion Paper
A New Indicator of Common Wage Inflation
The cyclical state of the economy and the natural rate of unemployment are key unobserved variables in policymakers' analysis of economic developments. The price Phillips curve relates the measures of resource utilization—often through deviations of the unemployment rate from the natural rate of unemployment—to consumer price inflation.
Working Paper
The macroeconomic effects of large-scale asset purchase programs
We simulate the Federal Reserve second Large-Scale Asset Purchase program in a DSGE model with bond market segmentation estimated on U.S. data. GDP growth increases by less than a third of a percentage point and inflation barely changes relative to the absence of intervention. The key reasons behind our findings are small estimates for both the elasticity of the risk premium to the quantity of long-term debt and the degree of financial market segmentation. Absent the commitment to keep the nominal interest rate at its lower bound for an extended period, the effects of asset purchase programs ...