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Working Paper
Tractable Rare Disaster Probability and Options-Pricing
Liao, Gordon Y.; Barro, Robert J. (2019-09-27)
We derive an option-pricing formula from recursive preference and estimate rare disaster probability. The new options-pricing formula applies to far-out-of-the money put options on the stock market when disaster risk dominates, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. The formula conforms with options data on the S&P 500 index from 1983-2018 and for analogous indices for other countries. The disaster probability, inferred from monthly fixed effects, is highly correlated across countries, peaks during the ...
Finance and Economics Discussion Series , Paper 2019-073

Working Paper
Investor Sentiment and the (Discretionary) Accrual-return Relation
Sun, Bo; Jiang, Jiajun; Liu, Qi (2020-09-18)
Discretionary accruals are positively associated with stock returns at the aggregate level but negatively so in the cross section. Using Baker-Wurgler investor sentiment index, we find that a significant presence of sentiment-driven investors is important in accounting for both patterns. We document that the aggregate relation is only prominent during periods of high investor sentiment. Similarly, the cross-section relation is considerably stronger in high-sentiment periods in both economic magnitude and statistical significance. We then embed investor sentiment into a stylized model of ...
International Finance Discussion Papers , Paper 1300

Report
Early contract renegotiation: An analysis of U.S. labor contracts from 1970 to 1995
Rich, Robert W.; Tracy, Joseph (2011)
This paper examines the ex post flexibility of U.S. labor contracts during the 1970-95 period by investigating whether unanticipated changes in inflation increase the likelihood of a contract being renegotiated prior to its expiration. We find strong empirical support for this hypothesis. Specifically, our results indicate that renegotiations are triggered principally by large and infrequent price shocks of either sign. When combined with evidence that ex ante contract durations are shorter during episodes of increased inflation uncertainty, our results suggest that these contracts are ...
Staff Reports , Paper 521

Working Paper
Inflation targeting under imperfect knowledge
Williams, John C.; Orphanides, Athanasios (2006)
A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational ...
Finance and Economics Discussion Series , Paper 2006-20

Report
Central bank transparency under model uncertainty
Eusepi, Stefano (2005)
This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the "correct" model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. ; The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations ...
Staff Reports , Paper 199

Report
Rethinking the measurement of household inflation expectations: preliminary findings
Topa, Giorgio; Potter, Simon M.; Bruine de Bruin, Wändi; Bryan, Michael F.; Van der Klaauw, Wilbert (2008)
This paper reports preliminary findings from a Federal Reserve Bank of New York research program aimed at improving survey measures of inflation expectations. We find that seemingly small differences in how inflation is referred to in a survey can lead respondents to consider significantly different price concepts. For near-term inflation, the "prices in general" question in the monthly Reuters/University of Michigan Surveys of Consumers can elicit responses that focus on the most visible prices, such as gasoline or food. Questions on the "rate of inflation" can lead to responses on the ...
Staff Reports , Paper 359

Journal Article
Risk and uncertainty
Guerron-Quintana, Pablo (2012-01)
Many news reports and economic experts talk about uncertainty. But what does the word mean in an economic context? Specifically, what do economists have in mind when they talk about it? In this article, Pablo Guerron-Quintana discusses the concepts of risk and uncertainty, what the difference is between the two terms, and why their presence in the economy may have widespread effects. He also talks about measuring risk at the aggregate level ? that is, risk that affects all participants in the economy ? and he reviews the various types of risk measures that economists have proposed.
Business Review , Issue Q1 , Pages 9-18

Speech
Output gaps and robust policy rules : a speech at the 2010 European Banking & Financial Forum, Czech National Bank, Prague, The Czech Republic, March 23, 2010
Plosser, Charles I. (2010-03-23)
Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia> 2010 European Banking & Financial Forum, Czech National Bank, Prague, The Czech Republic, March 23, 2010
Speech , Paper 36

Working Paper
Constructing Fan Charts from the Ragged Edge of SPF Forecasts
Clark, Todd E.; Ganics, Gergely; Mertens, Elmar (2022-11-23)
We develop a model that permits the estimation of a term structure of both expectations and forecast uncertainty for application to professional forecasts such as the Survey of Professional Forecasters (SPF). Our approach exactly replicates a given data set of predictions from the SPF (or a similar forecast source) without measurement error. Our model captures fixed horizon and fixed-event forecasts, and can accommodate changes in the maximal forecast horizon available from the SPF. The model casts a decomposition of multi-period forecast errors into a sequence of forecast updates that may be ...
Working Papers , Paper 22-36

Report
Macroeconomic Volatility and External Imbalances
Perri, Fabrizio; Fogli, Alessandra (2015-05-11)
Does macroeconomic volatility/uncertainty affect accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this ...
Staff Report , Paper 512

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