Optimal Monetary and Prudential Policies

By Fabrice Collard, Harris Dellas, Behzad Diba, and Olivier Loisel

American Economic Journal: Macroeconomics, January 2017

The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential...

Liquidity Traps and Jobless Recoveries

By Stephanie Schmitt-Grohé and Martín Uribe

American Economic Journal: Macroeconomics, January 2017

This paper proposes a model that explains the joint occurrence of liquidity traps and jobless growth recoveries. Its key elements are downward nominal wage rigidity, a Taylor-type interest rate feedback rule, the zero lower bound on nominal interest rates...

Targeting Long Rates in a Model with Segmented Markets

By Charles T. Carlstrom, Timothy S. Fuerst, and Matthias Paustian

American Economic Journal: Macroeconomics, January 2017

This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estima...

The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities

By Marco Del Negro, Gauti Eggertsson, Andrea Ferrero, and Nobuhiro Kiyotaki

American Economic Review, March 2017

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated ...

Safe Assets, Liquidity, and Monetary Policy

By Pierpaolo Benigno and Salvatore Nisticò

American Economic Journal: Macroeconomics, April 2017

This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause ...

Aggregate Demand and the Top 1 Percent

By Adrien Auclert and Matthew Rognlie

American Economic Review, May 2017

There has been a large rise in US top income inequality since the 1980s. We merge a widely studied model of the Pareto tail of labor incomes with a canonical model of consumption and savings to study the consequences of this increase for aggregate demand....

Rents, Technical Change, and Risk Premia Accounting for Secular Trends in Interest Rates, Returns on Capital, Earning Yields, and Factor Shares

By Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas

American Economic Review, May 2017

The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order ma...

Euro-Area Quantitative Easing and Portfolio Rebalancing

By Ralph S. J. Koijen, François Koulischer, Benoît Nguyen, and Motohiro Yogo

American Economic Review, May 2017

We use new and comprehensive data on the security holdings of euro-area investors to document facts about the ongoing quantitative easing program. The holdings of purchase-eligible government bonds have strong home bias not only for banks but also for ins...

Uncertainty at the Zero Lower Bound

By Taisuke Nakata

American Economic Journal: Macroeconomics, July 2017

When the policy rate is at the zero lower bound (ZLB), an increase in uncertainty regarding the future path of exogenous shocks alters the conditional expectations of relevant prices facing households and firms. Accordingly, an increase in uncertainty alt...

The Empirical Implications of the Interest-Rate Lower Bound

By Christopher Gust, Edward Herbst, David López-Salido, and Matthew E. Smith

American Economic Review, July 2017

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy to the lower bound in late 2008 as well as the contributi...

The Safe Assets Shortage Conundrum

[Symposium: The Global Monetary System]

By Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas

Journal of Economic Perspectives, Summer 2017

A safe asset is a simple debt instrument that is expected to preserve its value during adverse systemic events. The supply of safe assets, private and public, has historically been concentrated in a small number of advanced economies, most prominently t...

Dealing with Monetary Paralysis at the Zero Bound

[Symposium: The Global Monetary System]

By Kenneth Rogoff

Journal of Economic Perspectives, Summer 2017

Recently, the key constraint for central banks is the zero lower bound on nominal interest rates. Central banks fear that if they push short-term policy interest rates too deeply negative, there will be a massive flight into paper currency. This paper...

Federal Budget Policy with an Aging Population and Persistently Low Interest Rates

By Douglas W. Elmendorf and Louise M. Sheiner

Journal of Economic Perspectives, Summer 2017

Some observers have argued that the projections for high and rising debt pose a grave threat to the country's economic future and give the government less fiscal space to respond to recessions or other unexpected developments, so they urge significant cha...

Noisy News in Business Cycles

By Mario Forni, Luca Gambetti, Marco Lippi, and Luca Sala

American Economic Journal: Macroeconomics, October 2017

We investigate the role of "noise" shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that id...

News Shocks and the Slope of the Term Structure of Interest Rates: Comment

By Danilo Cascaldi-Garcia

American Economic Review, October 2017

Kurmann and Otrok (2013) establish that the effects on economic activity from news on future productivity growth are similar to the effects from unexpected changes in the slope of the yield curve. This comment shows that these results become substantially...

News Shocks and the Slope of the Term Structure of Interest Rates: Reply

By André Kurmann and Christopher Otrok

American Economic Review, October 2017

This reply to Cascaldi-Garcia's (2017) comment argues that by using the original code of Kurmann and Otrok (2013) with new data on utilization-adjusted TFP, Cascaldi-Garcia (2017) confounds positive and negative news shocks. With a small modification to t...

Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging

By Marco Di Maggio, Amir Kermani, Benjamin J. Keys, Tomasz Piskorski, Rodney Ramcharan, Amit Seru, and Vincent Yao

American Economic Review, November 2017

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by vol...

Short-Run and Long-Run Effects of Milton Friedman's Presidential Address

[Symposium: Friedman's Natural Rate Hypothesis after 50 Years]

By Robert E. Hall and Thomas J. Sargent

Journal of Economic Perspectives, Winter 2018

The centerpiece of Milton Friedman's (1968) presidential address to the American Economic Association, delivered in Washington, DC, on December 29, 1967, was the striking proposition that monetary policy has no longer-run effects on the real economy. Fr...

Monetary Policy According to HANK

By Greg Kaplan, Benjamin Moll, and Giovanni L. Violante

American Economic Review, March 2018

We revisit the transmission mechanism from monetary policy to household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two fea...

Investment Hangover and the Great Recession

By Matthew Rognlie, Andrei Shleifer, and Alp Simsek

American Economic Journal: Macroeconomics, April 2018

We present a model of investment hangover motivated by the Great Recession. Overbuilding of durable capital such as housing requires a reallocation of productive resources to other sectors, which is facilitated by a reduction in the interest rate. When mo...