Brent Bundick

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Working Papers

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.

From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective (with Nicolas Petrosky-Nadeau)

The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy that stabilizes employment “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to firms’ expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher inflation, employment, and nominal policy rates on average and also produces better outcomes during a zero lower bound episode. Our model suggests that the FOMC’s reinterpretation of its employment mandate could alter the business cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.
The Term Structure of Monetary Policy Uncertainty
Trenton Herriford and A. Lee Smith)

This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but instead are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing on just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy SVAR setting which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.

Should We Be Puzzled by Forward Guidance?
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, 2020, 102(5): 946-965. 

Additional Material:  Technical Appendix & Slides

Uncertainty 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

Blog Coverage:  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. 

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

Shorter Works

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,

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,

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,

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.