Shifts in US Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?

[Symposium: The First 100 Years of the Federal Reserve]

By Julio J. Rotemberg

Journal of Economic Perspectives, Fall 2013

This paper considers some of the large changes in the Federal Reserve's approach to monetary policy. It shows that, in some important cases, critics who were successful in arguing that past Fed approaches were responsible for mistakes that caused harm ...

Exchange Rate Predictability

By Barbara Rossi

Journal of Economic Literature, December 2013

The main goal of this article is to provide an answer to the question: does anything forecast exchange rates, and if so, which variables? It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a r...

Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling

By Serena Ng and Jonathan H. Wright

Journal of Economic Literature, December 2013

This paper provides a survey of business cycle facts, updated to take account of recent data. Emphasis is given to the Great Recession, which was unlike most other postwar recessions in the United States in being driven by deleveraging and financial mar...

Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment

By Michael D. Bauer, Glenn D. Rudebusch, and Jing Cynthia Wu

American Economic Review, January 2014

Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the trend, cycle, and macroeconomic determinants of the ...

Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Reply

By Jonathan H. Wright

American Economic Review, January 2014

Bauer, Rudebusch, and Wu (2014) advocate the use of bias-corrected estimates in their comment on Wright (2011). Econometric estimation of a macro-finance VAR provides quite imprecise estimates of future short-term interest rates. Nonetheless, compariso...

Persistent Liquidity Effects and Long-Run Money Demand

By Fernando Alvarez and Francesco Lippi

American Economic Journal: Macroeconomics, April 2014

We present a monetary model with segmented asset markets that implies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an ...

The Natural Rate of Interest and Its Usefulness for Monetary Policy

By Robert Barsky, Alejandro Justiniano, and Leonardo Melosi

American Economic Review, May 2014

We estimate a state-of-the-art DSGE model to study the natural rate of interest in the United States over the last 20 years. The natural rate is highly procyclical, and fell substantially below zero in each of the last three recessions. Although the drop ...

The Role of Policy in the Great Recession and the Weak Recovery

By John B. Taylor

American Economic Review, May 2014

This paper reports on recent research showing that the severe recession of 2007-2009 and the weak recovery have been due to poor economic policies and the failure to implement good policies during the past decade. Monetary policy, fiscal policy, and regul...

Sovereign Debt Booms in Monetary Unions

By Mark Aguiar, Manuel Amador, Emmanuel Farhi, and Gita Gopinath

American Economic Review, May 2014

We propose a continuous time model to investigate the impact of inflation credibility on sovereign debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces th...

"Fisher Dynamics" in US Household Debt, 1929-2011

By J. W. Mason and Arjun Jayadev

American Economic Journal: Macroeconomics, July 2014

The evolution of debt-income ratios over time depends on income growth, inflation, and interest rates, independent of any changes in borrowing. We examine the effect of these "Fisher dynamics" on household debt-income ratios in the United States over the ...

Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

By Eric T. Swanson and John C. Williams

American Economic Review, October 2014

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term...

Monetary Policy without Interest Rates: Evidence from France's Golden Age (1948 to 1973) Using a Narrative Approach

By Eric Monnet

American Economic Journal: Macroeconomics, October 2014

Central banking in France from 1948 to 1973 was a paradigmatic example of a policy that relied on quantities rather than interest rates. Standard SVAR analyses support the common view that monetary policy was ineffective during this period. However, th...

Risk Matters: The Real Effects of Volatility Shocks: Comment

By Benjamin Born and Johannes Pfeifer

American Economic Review, December 2014

We show that the risk-shock business cycle model of Fernández-Villaverde et al. (2011) must be recalibrated because it underpredicts the targeted business cycle moments by a factor of three once a time aggregation error is corrected. Recalibrating the co...

Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints

By Aloísio Araújo, Susan Schommer, and Michael Woodford

American Economic Journal: Macroeconomics, January 2015

We consider the effects of central bank purchases of a risky asset as an additional dimension of policy alongside "conventional" interest rate policy in a general-equilibrium model of asset pricing with endogenous collateral constraints. The effects of as...

Monetary Policy Surprises, Credit Costs, and Economic Activity

By Mark Gertler and Peter Karadi

American Economic Journal: Macroeconomics, January 2015

We provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables. We first show that shocks identified using high frequency surprises around policy announcements as external instruments produce resp...

Monetary Policy and Real Borrowing Costs at the Zero Lower Bound

By Simon Gilchrist, David López-Salido, and Egon Zakrajšek

American Economic Journal: Macroeconomics, January 2015

This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surpr...

The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence

By Jordi Galí and Luca Gambetti

American Economic Journal: Macroeconomics, January 2015

We estimate the response of stock prices to monetary policy shocks using a time-varying coefficients VAR. Our evidence points to protracted episodes in which stock prices end up increasing persistently in response to an exogenous tightening of monetary po...

FOMC Forward Guidance and Investor Beliefs

By Arunima Sinha

American Economic Review, May 2015

This paper considers the effect of different dimensions of the FOMC's forward guidance on ex ante investor expectations about future changes in US Treasury yields. Options and Futures data for 2- and 10-year Treasuries is used to extract State-Price Densi...

Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity

By Francisco J. Buera and Benjamin Moll

American Economic Journal: Macroeconomics, July 2015

We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the ...

Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions

By Andrés Fernández and Adam Gulan

American Economic Journal: Macroeconomics, July 2015

Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corpora...