Welcome Research Experience Code CV
Did the Federal Reserve Break the Phillips Curve? Theory & Evidence of Anchoring Inflation Expectations
(with A. Lee Smith)
The anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the US but failed to anchor expectations in Japan. Moreover, the improved anchoring of US inflation expectations can account for much of the observed flattening of the Phillips curve. Finally, we present evidence that initial Federal Reserve communication around its longer-run inflation objective may have led inflation expectations to anchor at a level below 2 percent.
|Forward Guidance, Monetary Policy Uncertainty, & the Term Premium |
(with Trenton Herriford and A. Lee Smith)
When the Federal Reserve provides greater clarity about the path of future interest rates, term premia in longer-term bonds fall and economic activity increases. This interest rate uncertainty channel of forward guidance sheds light on three important issues in macroeconomics. First, this channel explains how forward guidance shapes term premia, both away from and at the zero lower bound. Second, our mechanism offers a novel explanation for the puzzling fact that monetary policy announcements affect distant real forward rates. Finally, we show that event studies overstate the effects of large-scale asset purchases when they fail to control for simultaneous forward guidance.
Additional Material: Technical Appendix
|Should We Be Puzzled by Forward Guidance?
(with A. Lee Smith)
We use a range of vector autoregression models to answer the central question of how much output responds to changes in interest rate expectations following a monetary policy shock. Despite distinct identification strategies and sample periods, we find surprising agreement regarding this elasticity across empirical models. We then show that in a standard model of nominal rigidity estimated using impulse response matching, forward guidance shocks produce an elasticity of output with respect to expected interest rates similar to our empirical estimates. Our results suggest that standard macroeconomic models do not overstate the observed sensitivity of output to expected interest rates.
Additional Material: Technical Appendix
Endogenous Volatility at the Zero Lower Bound:
Implications for Stabilization Policy (with Susanto Basu)
At the zero lower bound, the central bank's inability to offset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes significant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and fiscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and stochastic volatility in the recent macroeconomic data.
Also available as NBER Working Paper 21838
Real Fluctuations at the Zero Lower Bound
Aggregate demand becomes upward sloping when the economy is stuck at the zero lower bound. Thus, the economy may respond very differently to real shocks. A positive technology shock which shifts aggregate supply downward can cause a large contraction in output. However, these differential responses to shocks emerge when the central bank follows a standard Taylor rule (TR) subject to the zero lower bound. This rule implies that the central bank stops responding to the state of the economy at the zero lower bound. This assumption is inconsistent with the recent behavior by monetary policymakers. The responses to shocks may not be so different if the central bank follows a history-dependent (HD) rule, which continues to respond the economy using expectations about future policy.
The Dynamic Effects of Forward Guidance Shocks (with A. Lee Smith)
We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. In the data, forward guidance shocks that lower the expected path of policy stimulate economic activity and prices (blue line). A standard model of monetary policy (red line) can largely replicate the dynamic responses from the empirical evidence. Our results suggest no disconnect between the empirical effects of forward guidance shocks and the predictions from a standard model of monetary policy.
The Review of Economics & Statistics, Forthcoming.
Additional Material: Technical Appendix & Slides
Shocks in a Model of Effective Demand (with Susanto Basu)
An uncertainty shock in the data causes a contraction in output and its components. A standard model of nominal price rigidity is fully consistent with this empirical evidence. We calibrate changes in uncertainty using implied stock market volatility and find that increased uncertainty about the future may have played a significant role in worsening the Great Recession.
Econometrica, 2017, 85(3): 937-958.
Press and Blog Coverage: Reuters.com, Econbrowser
Also, see our Reply to the critique by de Groot, Richter, & Throckmorton, which was also published in Econometrica.
Additional Material: NBER Working Paper Version, Technical Appendix & Slides
|How Do FOMC Projections Affect Policy Uncertainty?
(with Trenton Herriford)
Uncertainty about future interest rates fell after the FOMC began releasing its participants’ projections for the appropriate federal funds rate. In addition, changes in the participant disagreement help explain movements in uncertainty around FOMC meetings.
Federal Reserve Bank of Kansas City Economic Review, 2017, 102(2): 5-22.
|Estimating the Monetary Policy Rule Perceived by Forecasters
The FOMC’s implicit monetary policy rule, as perceived by professional forecasters, is similar before and during the recent zero lower bound period.
Federal Reserve Bank of Kansas City Economic Review, 2015, 100(4): 33-49.
Summary: Macro Bulletin
|The Rise and Fall of College Tuition Inflation (with Emily Pollard)
We document changes in college tuition over time and attempt to explain the long rise and subsequent fall in college tuition inflation. Statistical evidence suggests that wages in the education sector and state appropriations to higher education both play an important role in explaining changes in college tuition inflation.
Federal Reserve Bank of Kansas City Economic Review, 2019, 104(1): 57-75.
Discussion of Monetary Policy Slope & the Stock Market
By Andreas Neuhierl and Michael Weber
Midwest Finance Association Annual Meeting, March 2018
Discussion of Learning in the Oil Futures Market: Evidence & Macroeconomic Implications
By Sylvain Leduc, Kevin Moran, and Robert Vigfusson
Federal Reserve System Energy Conference, September 2017
Discussion of Oil Volatility Risk
By Lin Gao, Steffen Hitzemann, Ivan Shaliastovich, & Lai Xu
American Finance Association Meeting, January 2017
Discussion of Global Dynamics at the Zero Lower Bound
By William T. Gavin, Benjamin D. Keen, Alexander Richter, & Nathaniel Throckmorton
Federal Reserve System Macroeconomics Meeting, April 2014
Policymakers Have Options for Additional Accommodation: Forward Guidance and Yield Curve Control
With the federal funds rate near zero, policymakers are evaluating options for providing additional monetary policy accommodation, including a tool known as yield curve control. We find that despite low nominal Treasury yields, some scope for additional accommodation remains should policymakers deem it appropriate. However, we argue that forward guidance about future interest rates could deliver much, though not all, of the accommodation of yield curve control.
Federal Reserve Bank of Kansas City Economic Bulletin, 2020.
The Persistent Effects of the Temporary Tightening in Financial Conditions
Market-based measures of uncertainty, a common proxy for broader financial conditions, rose sharply in the fourth quarter of 2018. While the recent increase in uncertainty was brief, the temporary tightening in financial conditions will likely have longer-lasting effects on economic activity and prices.
Federal Reserve Bank of Kansas City Economic Bulletin, 2019.
Book Review of The Structural Foundations of Monetary Policy
Edited by Michael D. Bordo, John H. Cochrane, and Amit Seru.
Journal of Economic Literature, 2019.
Does the Recent Decline in Household Longer-Term Inflation Expectations Signal a Loss of Confidence in the FOMC? (with Trenton Herriford, Emily Pollard, and A. Lee Smith)
Over the past five years, the number of households with high inflation expectations has fallen, while the number of households with low inflation expectations has increased. This shift in composition helps to explain the recent decline in household longer-term inflation expectations. It does not suggest a loss of confidence in the FOMC’s ability to achieve its price stability mandate, however, as households with low inflation expectations give policymakers higher marks than do households with high inflation expectations.
Federal Reserve Bank of Kansas City Economic Bulletin, 2017.
Are Longer-Term Inflation Expectations Stable? (with Craig Hakkio)
Throughout 2014, survey-based expectations of inflation were relatively stable and consistent with the FOMC’s longer-term inflation objective of 2 percent. However, individual participants’ longer-term forecasts can vary considerably and are not always aligned with this target.
Federal Reserve Bank of Kansas City Economic Bulletin, 2015.