Rewriting Monetary Policy 101: What's the Fed's Preferred Post-Crisis Approach to Raising Interest Rates?

By Jane E. Ihrig, Ellen E. Meade, and Gretchen C. Weinbach

Journal of Economic Perspectives, Fall 2015

For many years prior to the global financial crisis, the Federal Open Market Committee set a target for the federal funds rate and achieved that target through small purchases and sales of securities in the open market. In the aftermath of the finan...

Are Sticky Prices Costly? Evidence from the Stock Market

By Yuriy Gorodnichenko and Michael Weber

American Economic Review, January 2016

We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust...

Exchange Rates, Interest Rates, and the Risk Premium

By Charles Engel

American Economic Review, February 2016

The uncovered interest parity puzzle concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits. A separate puzzle is that high real interest rate countries tend to have currencies that ar...

University Differences in the Graduation of Minorities in STEM Fields: Evidence from California

By Peter Arcidiacono, Esteban M. Aucejo, and V. Joseph Hotz

American Economic Review, March 2016

We examine differences in minority science graduation rates among University of California campuses when racial preferences were in place. Less prepared minorities at higher ranked campuses had lower persistence rates in science and took longer to grad...

Liquidity Trap and Excessive Leverage

By Anton Korinek and Alp Simsek

American Economic Review, March 2016

We investigate the role of macroprudential policies in mitigating liquidity traps. When constrained households engage in deleveraging, the interest rate needs to fall to induce unconstrained households to pick up the decline in aggregate demand. If the...

The Exchange Rate Response to Monetary Policy Innovations

By Viktoria Hnatkovska, Amartya Lahiri, and Carlos A. Vegh

American Economic Journal: Macroeconomics, April 2016

We present a new data fact: in response to a monetary tightening, the domestic currency tends to appreciate in developed countries but depreciate in developing countries. A model is developed to rationalize this contrasting pattern. It has three key chann...

Monetary Policy, Financial Stability, and the Zero Lower Bound

By Stanley Fischer

American Economic Review, May 2016

Much has happened in the world of central banking in the past decade. In this paper, I focus on three issues associated with the zero lower bound (ZLB) on short-term nominal interest rates and the nexus between monetary policy and financial stability: 1) ...

On the Optimal Inflation Rate

By Markus K. Brunnermeier and Yuliy Sannikov

American Economic Review, May 2016

In our incomplete markets economy households choose portfolios consisting of risky (uninsurable) capital and money. Money is a bubble, it has positive value even though it yields no payoff. The market outcome is constrained Pareto inefficient due to a pec...

Secular Stagnation in the Open Economy

By Gauti B. Eggertsson, Neil R. Mehrotra, and Lawrence H. Summers

American Economic Review, May 2016

Conditions of secular stagnation--low interest rates, below target inflation, and sluggish output growth--now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnati...

Safe Asset Scarcity and Aggregate Demand

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

American Economic Review, May 2016

We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming style environment. Acute safe asset scarcity forces the economy into a "safety trap" recession. In the open economy, safe asset scarcity spreads fro...

What Makes US Government Bonds Safe Assets?

By Zhiguo He, Arvind Krishnamurthy, and Konstantin Milbradt

American Economic Review, May 2016

US government bonds are considered to be the world's safe store of value, especially during periods of economic turmoil such as the events of 2008. But what makes US government bonds "safe assets"? We highlight coordination among investors, and build a mo...

Capital Flows: Expansionary or Contractionary?

By Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, and Marcos Chamon

American Economic Review, May 2016

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers, however, believe that inflows lead to credit booms and rising output; the e...

Interest Rates and Equity Extraction during the Housing Boom

By Neil Bhutta and Benjamin J. Keys

American Economic Review, July 2016

Credit record panel data from 1999-2010 indicates that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates reached historic lows. We estimate a 27 percent rise in extraction...

Sovereign Default Risk and Uncertainty Premia

By Demian Pouzo and Ignacio Presno

American Economic Journal: Macroeconomics, July 2016

This paper studies how international investors' concerns about model misspecification affect sovereign bond spreads. We develop a general equilibrium model of sovereign debt with endogenous default wherein investors fear that the probability model of the ...

Regional Redistribution through the US Mortgage Market

By Erik Hurst, Benjamin J. Keys, Amit Seru, and Joseph Vavra

American Economic Review, October 2016

Regional shocks are an important feature of the US economy. Households' ability to self-insure against these shocks depends on how they affect local interest rates. In the United States, most borrowing occurs through the mortgage market and is influenced ...