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Working Paper
How Robust Are Makeup Strategies to Key Alternative Assumptions?
We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations. We survey empirical evidence on the behavior of shorter-run and long-run inflation expectations. Using simulations from the FRB/US macroeconomic model, we find that makeup strategies can moderately offset the real effects of adverse economic shocks, even when much of the public is uninformed about the monetary strategy. We also discuss the robustness of makeup ...
Working Paper
The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model
This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. Hence, anticipation ...
Working Paper
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.
Working Paper
Uncovered interest rate, overshooting, and predictability reversal puzzles in an emerging economy
By using realized and survey-based expected exchange rate data, the paper presents five key findings regarding the Uncovered Interest rate Parity (UIP) and related puzzles in an Emerging Market (EM). First, Fama regressions, when not accounting for shifts in the UIP relationship, yield slopes that are statistically identical to one, irrespective of whether survey-based expected exchange rates or realized exchange rates are used. Second, caution is necessary however, as our analysis identifies three distinct sub-periods within each exchange rate measure, each exhibiting varying levels of ...
Working Paper
Uncovered interest rate, overshooting, and predictability reversal puzzles in an emerging economy
By using realized and survey-based expected exchange rate data, the paper presents five key findings regarding the Uncovered Interest rate Parity (UIP) and related puzzles in an Emerging Market (EM). First, Fama regressions, when not accounting for shifts in the UIP relationship, yield slopes that are statistically identical to one, irrespective of whether survey-based expected exchange rates or realized exchange rates are used. Second, caution is necessary however, as our analysis identifies three distinct sub-periods within each exchange rate measure, each exhibiting varying levels of ...
Working Paper
The Role of Learning for Asset Prices and Business Cycles
I examine the implications of learning-based asset pricing in a model in which firms face credit constraints that depend partly on their market value. Agents learn about stock prices, but have conditionally model-consistent expectations otherwise. The model jointly matches key asset price and business cycle statistics, while the combination of financial frictions and learning produces powerful feedback between asset prices and real activity, adding substantial amplification. The model reproduces many patterns of forecast error predictability in survey data that are inconsistent with rational ...
Discussion Paper
Who Is Driving the Recent Decline in Consumers Inflation Expectations?
The expectations of U.S. consumers about inflation have declined to record lows over the past several months. That is the finding of two leading surveys, the Federal Reserve Bank of New York’s Survey of Consumer Expectations (SCE) and the University of Michigan’s Survey of Consumers (SoC). In this post, we examine whether this decline is broad-based or whether it is driven by specific demographic groups.
Working Paper
The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model
This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. Forward guidance and the credibility of the central bank are uniquely modeled by utilizing a game-theoretic evolutionary framework. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, ...
Newsletter
Are Long-run Inflation Expectations Well Anchored?
Many observers anticipate that the recent run-up in inflation in the United States will prove to be temporary, and annual inflation will be near the Fed’s target of 2% in 2022 and 2023. An important consideration for policymakers, however, is whether the private sector will similarly read the rise in inflation as temporary. That is, are long-run inflation expectations likely to remain anchored, or might the sharp rise in inflation cause long-run expectations to increase substantially as well?
Discussion Paper
Political Polarization in Consumer Expectations
Following the 2016 presidential election, as noted on this blog and many other outlets, Americans’ political and economic outlook changed dramatically depending on partisan affiliation. Immediately after the election, Republicans became substantially more optimistic relative to Democrats. In this blog post, we revisit the issue of polarization over the past twelve months using data from the New York Fed’s Survey of Consumer Expectations (SCE)—also the focus of a detailed technical overview in the latest edition of the Bank’s journal, the Economic Policy Review. The overview walks ...