Timothy S. Fuerst |

Senior Economic Advisor

Tim Fuerst is a senior economic advisor in the Research Department. His research focuses on monetary policy. He is also the William and Dorothy O'Neill Professor of Economics at the University of Notre Dame.

Dr. Fuerst has a PhD and an MA in economics from the University of Chicago and a BS in economics and finance from Ohio Northern University.

Fed Publications
Other Publications

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Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs	December, 2012	Federal Reserve Bank of Cleveland, working paper no. 12-39	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing, as it exacerbates fluctuations in real activity. The household's desire to hedge business cycle risk, leads, via the financial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner's outcome) is significant. A menu of time-varying taxes and subsidies on household income and monitoring costs can decentralize the planner's allocations. But just one wedge, a time-varying tax on monitoring costs, can come close to achieving the planner's allocation. This can also be decentralized with a time-varying subsidy on loan repayment rates.
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Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration	December, 2012	Federal Reserve Bank of Cleveland, working paper no. 12-35	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen's inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models.
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Inflation and Output in New Keynesian Models with a Transient Interest Rate Peg	December, 2012	Federal Reserve Bank of Cleveland, working paper no. 12-34	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve.
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Gaps versus Growth Rates in the Taylor Rule	2012-17	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.
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Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration	June, 2012	Federal Reserve Bank of Cleveland, working paper no. 12-15.	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller.
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Estimating Contract Indexation in a Financial Accelerator Model	June, 2012	Federal Reserve Bank of Cleveland, working paper no. 12-16	Timothy S Fuerst; Charles T Carlstrom; Alberto Ortiz; Matthias Paustian;	Working Papers
	Abstract: This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation.
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Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs	January, 2012	Federal Reserve Bank of Cleveland, working paper no. 12-04	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing as it exacerbates fluctuations in real activity. The household's desire to hedge business cycle risk, leads, via the financial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner outcome) is quite large. A countercyclical tax on lender profits comes close to achieving the planner outcome.
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How Inflationary Is an Extended Period of Low Interest Rates?	January, 2012	Federal Reserve Bank of Cleveland, Working Paper no. 12-02	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations.
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Indexed Debt Contracts and the Financial Accelerator	August, 2011	Federal Reserve Bank of Cleveland, working paper no. 11-17	Timothy S Fuerst; Charles T Carlstrom; Matthias Paustian;	Working Papers
	Abstract: This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
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Monetary Policy in a World with Interest on Reserves	2010-4	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Banks have long been required to hold reserves equal to a percentage of their net transactions accounts (checkable deposits, for example), but until recently, they earned no interest on those reserves. The Fed now pays interest on required and excess reserve balances, having been granted the authority by Congress and putting the policy into place ahead of schedule so that it could be used to help address the financial crisis. The policy will be particularly useful when it is time to start tightening policy and unwind the Fed’s balance sheet.
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Explaining Apparent Changes in the Phillips Curve: The Great Moderation and Monetary Policy	February 2008	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Observations that the Phillips curve may be deviating from historical norms are important to policymakers because deviations would imply that more or less output has to be sacrificed to achieve a permanent reduction in long-term inflation. But we argue that recent economic shocks and a shift in the Fed’s response to inflation may be leading economists to misestimate the curve.
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Explaining Apparent Changes in the Phillips Curve: Trend Inflation Isn't Constant	January 2008	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Monetary policymakers look to the Phillips curve—an expression of the relationship between inflation and the degree to which the economy is operating relative to its potential—for information about the cost of actions undertaken to lower inflation. Recent estimations of the curve suggest it is deviating from historical norms. We argue that changes in trend inflation and Fed operating procedures are not being taken into account in these estimations and that when they are, changes in the curve are minor and need not concern policymakers.
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Inflation Persistence, Inflation Targeting, and the Great Moderation	December, 2007	Federal Reserve Bank of Cleveland, Working Paper no. 0721	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980?s. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation.
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Inertial Taylor Rules: The Benefit of Signaling Future Policy	March 2007	Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 17	Timothy S Fuerst; Charles T Carlstrom;	Policy Discussion Papers
	Abstract: We trace the consequences of an energy shock on the economy under two different monetary policy rules: a standard Taylor rule where the Fed responds to inflation and the output gap; and a Taylor rule with inertia where the Fed moves slowly to the rate predicted by the standard rule. We show that with both sticky wages and sticky prices, the outcome of an inertial Taylor rule is superior to that of the standard rule, in the sense that inflation is lower and output is higher following an adverse energy shock. However, if prices alone are sticky, things are less clear and the standard rule delivers substantially less inflation than the inertial rule in the short run.
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Central Bank Independence and Inflation: A Note	December, 2006	Federal Reserve Bank of Cleveland, Working Paper no. 0621	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: We document increased central bank independence within the set of industrialized nations. This increased independence can account for nearly two thirds of the improved inflation performance of these nations over the last two decades.
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Milton Friedman, Teacher, 1912-2006	December 2006	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Nobel laureate Milton Friedman, who died on November 16, 2006, made monumental contributions to economics and changed the course of modern central banking. Many of his proposals for the conduct of monetary policy were controversial at the time he made them but are now widely accepted. This Commentary reviews some of them.
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Co-Movement in Sticky Price Models with Durable Goods	November, 2006	Federal Reserve Bank of Cleveland, Working Paper no. 0614	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by adding adjustment costs as in Topel-Rosen, the sticky wage model solves the co-movement puzzle and delivers reasonable volatilities.
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Central Bank Independence: The Key to Price Stability?	September 1, 2006	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Low inflation over long periods is the sign of an effective central bank. The authors suggest that a large fraction of the worldwide decline in inflation since the early 1980s results from an international movement toward more independent central banks.
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Considerable Period of Time: The Case for Signaling Future Policy	November 2005	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: There has been a remarkable increase in the FOMC’s communication over the last decade. Perhaps the most dramatic change was the inclusion of language indicating the possible direction of future policy. One example is the now famous "considerable-period" language that was inserted in August 2003. This forward-looking language was remarkable in that it seemingly signaled the Committee’s intention to keep rates low for an extended period. This Commentary analyzes the reasons behind the "considerableperiod-of-time" language, and it argues that such language was important to stem further declines in inflation since the funds rate was already close to its lower bound of zero.
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Oil Prices, Monetary Policy, and Counterfactual Experiments	September, 2005	Federal Reserve Bank of Cleveland, Working Paper no. 0510	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects.
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Oil Prices, Monetary Policy, and the Macroeconomy	July 2005	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? The authors discuss how to disentangle these two effects.
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Oil Prices, Monetary Policy, and the Macroeconomy	April 2005	Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 10	Timothy S Fuerst; Charles T Carlstrom;	Policy Discussion Papers
	Abstract: Every U.S. recession since 1971 has been preceded by two things: an oil price shock and an increase in the federal funds rate. Bernanke, Gertler, and Watson (1997,2004) investigated how much oil price shocks have contributed to output growth by asking the following counterfactual question: Empirically how much would we expect oil price increases to have contributed to output growth if the Fed had kept the rate constant instead of letting it increase? They concluded that, at most, half of the observed output declines can be attributed to oil price increases. Most were actually caused by funds rate increases. A problem with their empirical analysis, however, is that it implicitly assumes that the Fed can continually "fool" the public. That is, the funds rate is led constant even though the public actually expects the Fed to follow its historical policy rule of raising the funds rate in conjunction with oil price increases. We show that if the new policy rule were anticipated oil price increases would have had a much larger impact on output than suggested by Bernanke, Gertler, and Watson's analysis.
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Asset Prices, Nominal Rigidities, and Monetary Policy	December, 2004	Federal Reserve Bank of Cleveland, Working Paper no. 0413	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.
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Expected Inflation and TIPS	November 2004	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: When inflation-indexed Treasury securities were first introduced, economists hoped that they could be used to measure expected inflation easily. The only difference between securities that were indexed to inflation and those that were not was thought to be the extra compensation regular securities had to pay for what the market thought inflation would be. By now it is pretty clear that inflation-indexed Treasuries differ from regular securities in other ways that show up in the yields. This Commentary suggests what these are and discusses a method of correcting for them.
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Thinking about Monetary Policy without Money: A Review of Three Books: Inflation Targeting, Monetary Theory and Policy, and Interest and Prices	November, 2004	Federal Reserve Bank of Cleveland Working Paper no. 0410	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper reviews three recent books. Two books, one by Carl Walsh and one by Michael Woodford, focus on the development of monetary theory. In contrast, the third book is a collection of papers in an NBER volume on inflation targeting. This volume outlines some of the issues that arise when applying the tools described by Walsh and Woodford to the policy goal of targeting inflation rates. A central theme of all three works is the desirability of abstracting from money demand in the analysis of monetary policy. In our review we focus the bulk of our discussion on the absence of money in these models.
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Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note	December, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0321	Timothy S Fuerst; Scott L Baier; Charles T Carlstrom; Ralph Chami; Thomas F Cosimano; Collen Fullenkamp;	Working Papers
	Abstract: In "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Chami, Cosimano, and Fullenkamp (2001) (hereafter, CCF) analyze a cash-in-advance model in which capital goods are explicitly traded. The authors show that there is more responsiveness of consumption and output to changes in the money supply than exists in the standard neoclassical growth models. This note demonstrates that this arises because CCF implicitly imposed an additional equilibrium restriction on the Cooley and Hansen (1989) model. This restriction can be imposed only if the Cooley and Hansen model is subject to real indeterminacy which occurs whenever the risk aversion coefficient (denoted by lambda in the Chami et al. paper) exceeds 2.
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Investment and Interest Rate Policy: A Discrete Time Analysis	December, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0320	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.
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Comments on Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability	December, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0319	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: Benhabib, Schmitt-Grohe, and Uribe (2003) argue that if you relied solely on local analysis you would be led to believe that aggressive, backward-looking interest rate rules are sufficient for determinacy. But from the perspective of global analysis, backward-looking rules do not guarantee uniqueness of equilibrium and indeed may lead to cyclic and even chaotic equilibria. This comment argues that this result is premature. We utilize a discrete time model and make two observations. First, compared to their continuous time model, the cyclic equilibria under a backward-looking rule are much less likely to arise in a discrete time model. Second, pure backward-looking rules are less likely to suffer from these global indeterminacy problems than rules that also include current or future inflation.
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The Taylor Rule: A Guidepost for Monetary Policy?	July 2003	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: The Taylor rule, formerly mentioned only in scholarly economics journals, now pops up regularly in news magazines, finance journals, and central bankers’ speeches. Does the Fed follow the rule? Should it? This Commentary explains what the Taylor rule is, discusses why it seems to describe the Federal Reserve’s interest-rate setting, and argues that the rule is most valuable as a guideline rather than a prescription.
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Stock Prices and Output Growth: An Examination of the Credit Channel	August 15, 2002	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom; Vasso P Ioannidou;	Economic Commentary
	Abstract: When stock market values fall, we know that investors expect lower economic growth in the future. But can stock market declines actually affect future growth? There is some evidence that they can-through the credit channel.
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Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting	February 15, 2002	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But because banks base their actions on forecasts of future inflation, following the rule can lead to inflation-rate instability in some cases. A price-level target offers the same benefits as an inflation target but, because actions are based on past inflation, it avoids this vulnerability.
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Imperfect capital markets and nominal wage rigidities	January, 2002	Federal Reserve Bank of Cleveland, Working Paper no. 0205	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: Should monetary policy respond to asset prices? This paper analyzes a general equilibrium model with imperfect capital markets and rigid nominal wages. Within the context of this model, there is a natural role for the benevolent central bank to dampen the real effects of asset price movements.
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Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?	January, 2002	Federal Reserve Bank of Cleveland, Working Paper no. 0202	Timothy S Fuerst; Charles T Carlstrom; Fabio Ghironi;	Working Papers
	Abstract: What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor principle applies at the sectoral level, there is no need for a Taylor principle at the aggregate level.
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Monetary policy and asset prices with imperfect credit markets	December 2001	Federal Reserve Bank of Cleveland, Economic Review, vol. 37, no. 4, pp. 51-59	Timothy S Fuerst; Charles T Carlstrom;	Economic Review
	Abstract: The Modigliani-Miller theorem is fundamental to the theory of corporate finance. One of the theorem's immediate implications is that there is no reason for the monetary authority to respond to asset prices. This article posits a world in which the Modigliani-Miller theorem does not hold. The authors assume that the amount of an entrepreneur's external financing is limited by the amount of collateral she holds. They examine the implications for the monetary authority in such an environment.
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Monetary policy and self-fulfilling expectations: the danger of forecasts	March 2001	Federal Reserve Bank of Cleveland, Economic Review, vol. 37, no. 1, pp. 9-19	Timothy S Fuerst; Charles T Carlstrom;	Economic Review
	Abstract: What rule should a central bank interested in inflation stability follow? Because monetary policy tends to work with lags, it is tempting to use inflation forecasts to generate policy advice. This article, however, suggests that the use of forecasts to drive policy is potentially destabilizing. The problem with forecast-based policy is that the economy becomes vulnerable to what economists term "sunspot" fluctuations. These welfare-reducing fluctuations can be avoided by using a policy that puts greater weight on past, realized inflation rates rather than forecasted, future rates.
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Perils of Price Deflations: An Analysis of the Great Depression	February 15, 2001	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: If a central bank adopted a zero inflation target, it would, in practice, occasionally deviate up and down from that rate, and the economy would experience episodes of mild inflation and deflation. Is deflation—a decrease in the level of prices—a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect of massive price declines on output during the Great Depression. The authors find that while deflation can cause output to decline, mild episodes of deflation are unlikely to be a problem.
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Learning and the central bank	January, 2001	Federal Reserve Bank of Cleveland, Working Paper no. 0117	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: It is well known that sunspot equilibria may arise under an interest-rate operating procedure in which the central bank varies the nominal rate with movements in future inflation (a forward-looking Taylor rule). This paper demonstrates that these sunspot equilibria may be learnable in the sense of E-stability.
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Taylor rules in a model that satisfies the natural rate hypothesis	January, 2001	Federal Reserve Bank of Cleveland, Working Paper no. 0116	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: The authors analyze the restrictions necessary to ensure that the interest-rate policy rule used by the central bank does not introduce real indeterminacy into the economy. They conduct this analysis in a flexible price economy and a sticky price model that satisfies the natural rate hypothesis. A necessary and sufficient condition for real determinacy in the sticky price model is that there must be nominal and real determinacy in the corresponding flexible price model. This arises if and only if the Taylor rule responds aggressively to lagged inflation rates.
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Monetary policy in a world without perfect capital markets	January, 2001	Federal Reserve Bank of Cleveland, Working Paper no. 0115	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This working paper examines a theoretical model in which an entrepreneur's net worth affects his ability to finance current activity. Net worth, in turn, is determined by asset prices, which can be affected by monetary policy. In this environment, the central bank plays a welfare-improving role by responding to asset price and technology shocks.
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The fiscal theory of the price level	March 2000	Federal Reserve Bank of Cleveland, Economic Review, vol. 36, no. 1, pp. 22-32	Timothy S Fuerst; Charles T Carlstrom;	Economic Review
	Abstract: A traditional function of the central bank is to control the price level. The fiscal theory of the price level challenges this assumption, arguing instead that the fiscal authority's budgetary policy is the primary determinant of the price level. The authors provide a critical review of the fiscal theory and its implications for monetary policy.
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Monetary shocks, agency costs, and business cycles	January, 2000	Federal Reserve Bank of Cleveland, Working Paper no. 0011	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real-business-cycle model modified to include endogenous agency costs. The paper's chief contribution is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?
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Money growth rules and price level determinacy	January, 2000	Federal Reserve Bank of Cleveland, Working Paper no. 0010	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: The authors show that in a plausibly calibrated monetary model with explicit production, exogenous money growth rules ensure real determinacy and thus avoid sunspot fluctuations. Although it is theoretically possible to construct examples in which real indeterminacy does arise, these examples rely on implausible money-demand elasticities or ignore the effect of production on the model's dynamics.
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Forward-looking versus backward-looking Taylor rules	January, 2000	Federal Reserve Bank of Cleveland, Working Paper no. 0009	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper analyzes the restrictions necessary to ensure that the policy rule used by the central bank does not introduce real indeterminacy into the economy. It conducts this analysis in a flexible price economy and a sticky price model. A robust conclusion is that to ensure determinacy the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates.
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Forecasts and Sunspots: Looking Back for a Better Future	November 1999	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: To head off inflation before it gets started, central banks must use forecasts. But using forecasts to determine monetary policy actions introduces the possibility that inflation will increase just because the public expects it to. This Economic Commentary explains how random events—sunspots—can affect economic systems and lead to volatility in prices. The authors suggest that sunspots can be avoided with an approach that responds predominantly to past, rather than predicted, inflation.
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Money Growth and Inflation: Does Fiscal Policy Matter?	April 15, 1999	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
	Abstract: Is inflation (in the often-quoted words of Milton Friedman) “always and everywhere a monetary phenomenon”? Some say no, arguing that inflation is controlled not only by the central bank but also by the fiscal authority. This Commentary authors explore their argument, known as the fiscal theory of the price level.
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Optimal monetary policy in a small, open economy: a general-equilibrium analysis	January, 1999	Federal Reserve Bank of Cleveland, Working Paper no. 9911	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper uses a model of a small, open economy to address two monetary policy issues: 1) What restrictions on the policy rule ensure that the central bank does not introduce real indeterminacy into the economy? and 2) What is the optimal long-run rate of inflation? The model's simplicity makes analyzing determinacy issues remarkably transparent. As for long-run inflation rates, a small, open economy takes the foreign nominal interest rate as a given. To the extent that this rate distorts domestic behavior, positive domestic nominal rates (in contrast to Friedman's celebrated optimum quantity of money) play a role.
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Timing and real indeterminacy in monetary models	January, 1999	Federal Reserve Bank of Cleveland, Working Paper no. 9910R	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: An increasingly common approach to the theoretical analysis of monetary policy ensures that a proposed policy does not introduce real indeterminacy-and thus sunspot fluctuations-into the model economy. Policy is typically conducted in terms of directives for the nominal interest rate. This paper uses a discrete-time, money-in-the-utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy. These differences arise because of the differing pricing equations for the nominal interest rate.
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Price-level and interest-rate targeting in a model with sticky prices	January, 1998	Federal Reserve Bank of Cleveland, Working Paper no. 9819	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: An examination of a standard sticky-price monetary model whose conditions are perturbed relative to the canonical real-business-cycle model by two varying distortions: marginal cost and the nominal rate of interest. The paper explores the implications of two monetary policies that are frequently advocated: (1) an inflation target and (2) an interest rate target.
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Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets	January, 1998	Federal Reserve Bank of Cleveland, Working Paper no. 9818R	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.
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Interest rate rules for seasonal and business cycles	July 1996	Federal Reserve Bank of Cleveland, Economic Commentary	Timothy S Fuerst; Charles T Carlstrom;	Economic Commentary
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The benefits of interest rate targeting: a partial and a general equilibrium analysis	June 1996	Federal Reserve Bank of Cleveland, Economic Review, vol. 32, no. 2, pp. 2-14	Timothy S Fuerst; Charles T Carlstrom;	Economic Review
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Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis	January, 1996	Federal Reserve Bank of Cleveland, Working Paper no. 9602	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: An analysis of the quantitative effects of agency costs in a real business cycle model, showing that these costs can explain why output growth displays positive autocorrelation at short horizons.
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Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy	January, 1995	Federal Reserve Bank of Cleveland, Working Paper no. 9504	Timothy S Fuerst; Charles T Carlstrom;	Working Papers
	Abstract: This paper considers the welfare consequences of two particularly simple rules for monetary policy: an interest rate peg and a money growth peg. The model economy consists of a real side that is the standard real business cycle model, and a monetary side that amounts to imposing cash-in-advance constraints on certain market transactions. The paper also considers the effect of assuming a rigidity in the typical household's cash savings choice. The competitive equilibrium of the economy is not Pareto efficient, partly because of two intertemporal distortions: a distortion on the capital accumulation decision, and a distortion on portfolio choice that arises from the assumed rigidity. The principal result of the paper is that the interest rate rule (but not the money growth rule) entirely eliminates these two intertemporal distortions and is thus the benevolent central banker' s policy choice.
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Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?	forthcoming	Journal of Economic Theory	Timothy S Fuerst; Charles T Carlstrom; Fabio Ghironi;	Journal Article
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Thinking about Monetary Policy without Money	forthcoming	International Finance	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Investment and Interest Rate Policy: A Discrete Time Analysis	forthcoming	Journal of Economic Theory	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Money Growth Rules and Self-Fulfilling Hyperinflations: A Note	forthcoming	Journal of Money Credit and Banking	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Optimal Fiscal and Monetary Policy under Imperfect Competition: A Comment	June 2004	Journal of Macroeconomics, V. 26, pp. 219-222, June 2004	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Learning and the Central Bank	March 2004	Journal of Monetary Economics V. 51, pp. 327-338, March 2004	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Capital Trading, Stock Trading and the Inflation-tax on Equity: A Note	October 2003	Review of Economic Dynamics, V.6 (4), pp. 767-789, October 2003	Timothy S Fuerst; Scott L Baier; Charles T Carlstrom; Ralph Chami; Thomas F Cosimano; Collen Fullenkamp;	Journal Article
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Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability: A Comment	2003	Journal of Money,Credit, and Banking 35(6) Part 2, 2003, pp. 1413-1424	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Money Growth Rules and Price Level Determinacy	April 2003	Review of Economic Dynamics, Volume 6 (2), pp. 263-275, April 2003	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Taylor Rules in a Model that Satisfies the Natural Rate Hypothesis	May 2002	American Economic Review, V. 92 (2), pp. 79-84, May 2002	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions	October 1, 2001	Review of Economic Dynamics, vol. 4, no. 4, October 2001, pp. 767-89	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Monetary Shocks, Agency Costs, and Business Cycles	May 1, 2001	Carnegie-Rochester Conference Series on Public Policy, vol. 54, no. 0, June 2001, pp. 1-27	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Timing and Real Indeterminacy in Monetary Models	April 1, 2001	Journal of Monetary Economics, vol. 47, no. 2, April 2001, pp. 285-98	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Agency Costs and Business Cycles	November 1, 1998	Economic Theory, vol. 12, no.3, November 1998, pp. 583-597	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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A Note of the Role of Countercyclical Monetary Policy	August 1, 1998	Journal of Political Economy, vol. 106, no. 4, August 1998, pp. 860-866	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Agency Costs, Net Worth, and Business Cycle Fluctuations: A Computable General Equilibrium Analysis	December 1, 1997	American Economic Review, vol. 87, no. 5, December 1997, pp. 893-910	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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Interest Rate Rules vs. Money Growth Rules: A Welfare Comparison in a Cash-in-Advance Economy	November 1, 1995	Journal of Monetary Economics, vol. 36, no. 2, November 1995, pp. 247-67	Timothy S Fuerst; Charles T Carlstrom;	Journal Article
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