| Click on column heading to sort | |||
|---|---|---|---|
| Title | Date | Publication | Author(s) |
|
Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures
|
2005 | Working Paper | Carlson, John B./Craig, Ben R./Melick, William R. |
| Abstract: This paper demonstrates how options on federal funds futures, which began trading in March 2003, can be used to recover the implied probability density function (PDF) for future Federal Open Market Committee (FOMC) interest rate outcomes. The discrete nature of the choices made by the FOMC allows for a very straightforward recovery of the implied PDF using ordinary least squares (OLS) estimation. This simple recovery method stands in contrast to the relatively complicated PDF recovery techniques developed for options written on assets such as equities, foreign exchange, or commodity futures where the underlying prices are most appropriately modeled as being drawn from continuous distributions. The OLS estimation is used to recover PDFs for single FOMC meetings as well as PDFs for joint estimation of multiple FOMC meetings, and allows for the imposition of restrictions on the recovered probabilities, both within and across FOMC meetings. Finally, recovered probabilities are used to assess the impact of data releases and Fed communication on the perceived likelihood of actual policy outcomes. |
|||
top |
|||
|
Considerable Period of Time: The Case of Signaling Future Policy
|
November 2005 | Economic Commentary | Carlstrom, Charles T./Fuerst, Timothy S. |
| Abstract: There has been a remarkable increase in the FOMCâ??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 â??considerable-periodâ?? language that was inserted in August 2003. This forward-looking language was remarkable in that it seemingly signaled the Committeeâ??s intention to keep rates low for an extended period. This Commentary analyzes the reasons behind the â??considerableperiod-of-timeâ?? 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. |
|||
top |
|||
|
How Should the Monetary Authority Respond to an Adverse Energy Shock?
|
May 2005 | Article | |
| Abstract: The monetary policy situation now facing the FOMC is a textbook classic of advanced macroeconomics courses: How should the monetary authority respond to an adverse energy shock? A reduced supply of oil to the United States can be expected to raise oil's price and to slow economic activity. Central banks want to do all they can to cushion the economy against the shock to growth by pursuing an easier monetary policy, but concerns about rising inflation can pull policymakers in the opposite direction. How does the savvy central bank navigate such troubled waters? |
|||
top |
|||
|
Oil Prices and the Macroeconomy
|
April 2005 | Article | |
| Abstract: Increases in oil prices and the funds rate have preceded every recession since the early 1970s. Oil price increases usually depress economic activity, but part of the decline in output results from the funds rate increase that typically occurs in conjunction with oil shocks; the reason is that oil shocks also increase inflationary pressures. To keep these pressures at bay, the Fed usually also increases the funds rate. Holding everything else constant, how much do an oil price shock and the ensuing funds rate increase affect GDP and inflation? |
|||
top |
|||
|
Monetary policy, endogenous inattention, and the volatility trade-off
|
Dec-01-2004 | Working Paper | Branch, William A./Carlson, John/Evans, George W./McGough, Bruce |
| Abstract: This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "great moderation" that began in the 1980s. |
|||
top |
|||
|
Firm-specific capital, nominal rigidities, and the business cycle
|
Dec-01-2004 | Working Paper | Altig, David/Christiano, Lawrence J./Eichenbaum, Martin/Linde, Jesper |
| Abstract: Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on inflation inertia even though firms re-optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined within a period. |
|||
top |
|||
|
Thinking about monetary policy without money: a review of three books: In ation Targeting, Monetary Theory and Policy, and Interest and Prices
|
Nov-01-2004 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Per Capita Income Growth and Disparity in the United States, 1929-2003
|
August 15, 2004 | Economic Commentary | Gomme, Paul/Rupert, Peter |
| Abstract: Economic theory says the average income of different regions should grow closer over time. Within the United States and across some of the richer countries, evidence suggests this is true. |
|||
top |
|||
|
Interest Rates, Yield Curves, and the Monetary Regime
|
June 2004 | Economic Commentary | Haubrich, Joseph G. |
| Abstract: The yield curve has a wealth of information about future interest rates and economic conditions. Users should exercise caution, though, as many of the relationships that hold between the behavior of the curve and what it fortells depend on the monetary regime in place at the time the curve is drawn. |
|||
top |
|||
|
The yield curve, recessions, and the credibility of the monetary regime: long-run evidence, 1875-1997
|
Apr-01-2004 | Working Paper | Bordo, Michael D./Haubrich, Joseph G. |
| Abstract: This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. The spread between corporate bonds and commercial paper reliably predicts future growth over the period 1875-1997. This predictability varies over time, however, particularly across different monetary regimes. In accord with our proposed theory, regimes with low credibility (high persistence of inflation) tend to have better predictability. |
|||
top |
|||
|
Comments on backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability
|
Dec-01-2003 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Pricing kernels, inflation, and the term structure of interest rates
|
Sep-01-2003 | Working Paper | Craig, Ben R./Haubrich, Joseph G. |
| Abstract: We estimate a discrete-time multivariate pricing kernel for the term structure of interest rates, using both yields and inflation rates. This gives a separate estimate of the real kernel and the nominal kernel, taking into account a relatively sophisticated dynamical structure and mutual interaction between the real and nominal side of the economy. Along with obtaining an estimate of the real term structure, we use the estimates to obtain a new perspective on how real and nominal influences interact to produce the observed term structure. |
|||
top |
|||
|
The Taylor rule: a guidepost for monetary policy?
|
Jul-01-2003 | Economic Commentary | Carlstrom, Charles T./Fuerst, Timothy S. |
| Abstract: The Taylor rule, which once was mentioned only in scholarly economics journals, now is popping up regularly in newsmagazines, 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 Fed interest-rate setting, and argues that the rule is most valuable as a guideline rather than a prescription. |
|||
top |
|||
|
Why are TIIS yields so high? The case of the missing inflation-risk premium
|
Mar-15-2003 | Economic Commentary | Craig, Ben |
| Abstract: Treasury inflation-indexed securities are just like nominal Treasuries, except that their coupon and principal payments are indexed to inflation. The yield spread between the two types of securities should serve as a daily measurement of the market's |
|||
top |
|||
|
Does it matter--for equilibrium determinacy--what price index the central bank targets?
|
Apr-01-2002 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S./Ghironi, Fabio |
| Abstract: What inflation rate should the central bank target? The authors address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. They assume that the degree of nominal price stickiness can vary across sectors and that labor is immobile. This paper's contribution is to demonstrate that a modified Taylor principle holds in this environment. If the central bank elects to target sector A and responds to price movements in this sector with a coefficient greater than unity, then this policy rule will ensure determinacy across all sectors. These results have at least two implications: First, the equilibrium-determinacy criterion does not imply a preference for any particular inflation measure. Second, since the Taylor principle applies at the sectoral level, the principle is unnecessary at the aggregate level. |
|||
top |
|||
|
Monetary policy rules and stability: inflation targeting versus price-level targeting
|
Feb-15-2002 | Economic Commentary | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Why haven't long-term interest rates fallen?
|
Jan-01-2002 | Economic Commentary | Altig, David/Nosal Ed |
| Abstract: In 2001, the Federal Reserve lowered the federal funds rate target more than it had in over 25 years, but long-term interest rates didn't budge. Has monetary policy become ineffective? Just the opposite, the authors argue. The stability of long-term rates shows that people don't expect inflation to rise. That confidence, especially in light of the dramatic shocks the economy experienced, attests to the success of the central bank's policies. |
|||
top |
|||
|
Taylor rules in a model that satisfies the natural rate hypothesis
|
Oct-01-2001 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets
|
Oct-01-2001 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Learning and the central bank
|
Oct-01-2001 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Monetary policy and self-fulfilling expectations: the danger of forecasts
|
Sep-15-2001 | Economic Review | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Who gets paid to save?
|
Sep-01-2001 | Working Paper | Gokhale, Jagadeesh/Kotlikoff, Laurance J. |
| Abstract: Thanks to recent changes in the tax law, people can contribute more to their tax-deductible and non-tax-deductible savings plans, including 401(k) and Roth IRAs. But should they? The myriad interacting provisions of the tax code make it difficult to predict who will gain from government savings incentives and by how much. This study examines how new legislation affects the lifetime tax gains (or losses) of low, middle, and high lifetime earners if they contribute the maximum to 401(k) accounts, traditional IRA accounts, and Roth IRA accounts. The study finds that the new legislation changes little for low- and middle-income earners, who paid higher lifetime taxes under the old tax law if they participated fully in tax-deferred plans and would still do so under the new law. If a new tax credit created by the legislation were extended and indexed to inflation, low earners would break even, but middle earners would still lose. In contrast, participating in a Roth IRA provides a guaranteed and nontrivial lifetime tax saving; however, one need not contribute the maximum to receive the full benefit. |
|||
top |
|||
|
Money, manufacturing, and the strong dollar
|
Jul-01-2001 | Economic Commentary | Humpage, Owen F. |
| Abstract: U.S. firms are facing tough international competition, and the U.S. trade deficit has grown to a level that some find alarming. Why doesn't the United States respond by easing monetary policy to lower the dollar's exchange rate and reduce the price of U.S. goods in foreign markets? This Commentary argues that monetary policy is incapable of improving the competitive position of U.S. manufacturing through exchange rate manipulation. The temporary gains monetary easing might achieve through a nominal dollar depreciation would be offset by higher inflation and decreased foreign investment. |
|||
top |
|||
|
Nominal rigidities and the dynamic effects of a shock to monetary policy
|
May-01-2001 | Working Paper | Christiano, Lawrence J./Eichenbaum, Martin/Evans, Charles |
| Abstract: The authors' model, embodying moderate amounts of nominal rigidities, accounts for the observed inertia in inflation and persistence in output. The key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts of average duration (three quarters) and variable capital utilization. |
|||
top |
|||
|
Perils of price deflations: an analysis of the Great Depression
|
Feb-15-2001 | Economic Commentary | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
The expectations trap hypothesis
|
Apr-01-2000 | Working Paper | Christiano, Lawrence J./Gust, Christopher |
| Abstract: The authors examine the inflation take-off of the early 1970s in terms of the expectations trap hypothesis, according to which fear of violating the public's inflation expectations pushed the Fed into producing high inflation. This interpretation is compared with the Phillips curve hypothesis, according to which the Fed produced high inflation as the unfortunate byproduct of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what should be done to prevent future inflation flare-ups. |
|||
top |
|||
|
Currency portfolios and nominal exchange rates in a dual currency search economy
|
Dec-01-1999 | Working Paper | Craig, Ben/Waller, Christopher J. |
| Abstract: The authors analyze a dual-currency search model in which agents may hold multiple units of both currencies. They study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to the magnitude of the "inflation tax" risk associated with each. When one currency has the right amount of risk, equilibria exist in which the safe currency trades for multiple units of the risky one (pure currency exchange). As a result, the steady state has a distribution of nominal exchange rates. The mean and variance of this distribution typically change in predictable ways when the fundamentals change. |
|||
top |
|||
|
Forecasts and sunspots: looking back for a better future
|
Nov-01-1999 | Economic Commentary | Carlstrom, Charles T./Fuerst, Timothy S. |
| Abstract: To head off inflation before it gets started, central banks must use forecasts to determine monetary policy actions. But doing so 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 create price volatility. The authors suggest that sunspots can be avoided with an approach that responds predominantly to past, rather than predicted, inflation. |
|||
top |
|||
|
Optimal monetary policy in a small, open economy: a general-equilibrium analysis
|
Sep-01-1999 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Firms' wage adjustments: a break from the past?
|
Aug-01-1999 | Working Paper | Groshen, Erica L./Schweitzer, Mark E. |
| Abstract: The authors examine 39 years of wage data for workers in mobile occupations within a set of employers in three midwestern cities. They study wage changes during years of rising, falling, and steady inflation to identify regularities that could broaden understanding of the inflationary process at the micro level. |
|||
top |
|||
|
Money growth and inflation: how long is the long run?
|
Aug-01-1999 | Economic Commentary | Fitzgerald, Terry J. |
| Abstract: In their efforts to maintain low inflation, policymakers pay little attention to the growth rate of the money supply. Yet many studies have found that money growth and inflation a closely related, at least in the long run. But how long must money growth remain strong before it begins to concern policymakers? That is, what is the shortest period over which money growth seems to be reliably associated with inflation? |
|||
top |
|||
|
Money growth and inflation: does fiscal policy matter?
|
Apr-15-1999 | Economic Commentary | Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
Taylor rules in a limited participation model
|
Mar-01-1999 | Working Paper | Christiano, Lawrence J./Gust, Christopher J. |
| Abstract: The authors use the limited participation model of money to study Taylor rules' operating characteristics for setting the interest rate. Rules are evaluated according to their ability to protect the economy from bad outcomes like the burst of inflation observed in the 1970s. On the basis of their analysis, the authors argue for a rule that 1) raises the nominal interest rate more than one-for-one with a rise in inflation; and 2) does not change the interest rate in response to a change in output relative to trend. |
|||
top |
|||
|
Price-level and interest-rate targeting in a model with sticky prices
|
Aug-01-1998 | Working Paper | Carlstrom, Charles T./Fuerst, Timothy S. |
| 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. |
|||
top |
|||
|
James Madison's monetary economics
|
Jul-20-1998 | Economic Review | Smith, Bruce D. |
| Abstract: An analysis of Madison's essay, "Money," and a presentation of a model giving rise to equilibria that mimic general observations about the consequences of government policies like the one Madison describes for limiting inflation. |
|||
top |
|||
|
In search of the NAIRU
|
May-01-1998 | Economic Commentary | Altig, David/Gomme, Paul |
| Abstract: The relationship between the unemployment rate and the nonaccelerating inflation rate of unemployment (NAIRU) is presumed to be an inflationary bellwether, but recent inflation predictions based on it have not been successful. The authors explore the reasons for this failure and suggest that it may be time to replace the NAIRU. |
|||
top |
|||
|
Money
|
Feb-06-1998 | Economic Review | Madison, James |
| Abstract: An essay, written in 1779-80, concerning the relationship between money growth, government liability issues, and inflation. |
|||
top |
|||
|
A hitchhiker's guide to understanding exchange rates
|
Jan-01-1998 | Economic Commentary | Humpage, Owen F. |
| Abstract: A nontechnical guide to exchange rates that discusses the role of inflation and monetary policy in determining exchange rate movements, uses balance-of-payments concepts to illustrate the economic role of the real exchange rate, and examines the crucial role of expectations. |
|||
top |
|||
|
Wage inflation and worker uncertainty
|
Aug-15-1997 | Economic Commentary | Schweitzer, Mark E. |
| Abstract: Compares two possible explanations of why pay increases continue to be moderate in a vigorous labor market--workers' uncertainty about their jobs and human resource managers' wage-setting behavior--and looks at how each explanation matches the evidence on the timing of inflation and wage changes. |
|||
top |
|||
|
Monetary policy in the cold war era
|
Jun-01-1997 | Economic Commentary | Sniderman, Mark S. |
| Abstract: An explanation of why, in the face of a booming economy, low unemployment, and scant inflation pressures, the Federal Reserve must continue its campaign to achieve price stability. |
|||
top |
|||
|
Okun's law revisited: should we worry about low unemployment?
|
May-15-1997 | Economic Commentary | Altig, David/Fitzgerald, Terry J./Rupert, Peter |
| Abstract: A review of the connection between labor resource utilization and the growth/unemployment correlation summarized by Okun's law, showing that the instability of that relationship, particularly over short time horizons, has important implications for monetary policy. |
|||
top |
|||
|
Is noninflationary growth an oxymoron?
|
May-01-1997 | Economic Commentary | Altig, David/Fitzgerald, Terry J./Rupert, Peter |
| Abstract: A review of the theoretical and empirical case for disinflationary economic growth, showing that, contrary to popular wisdom, it is quite possible to have a booming economy without an acceleration in the price level. |
|||
top |
|||
|
Maintaining a low inflation environment
|
Mar-01-1997 | Economic Commentary | Carlson, John B. |
| Abstract: An examination of monetary policy actions before and after 1982, illustrating that prompt federal funds rate increases aimed at maintaining a low inflation environment are associated with subsequent robust economic growth, not with weak growth, as is commonly thought. |
|||
top |
|||
Economic Research and Data