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50 posts on "Monetary Policy"

August 13, 2014

Why Didn’t Inflation Collapse in the Great Recession?



GDP contracted 4 percent from 2008:Q2 to 2009:Q2, and the unemployment rate peaked at 10 percent in October 2010. Traditional backward-looking Phillips curve models of inflation, which relate inflation to measures of “slack” in activity and past measures of inflation, would have predicted a substantial drop in inflation. However, core inflation declined by only one percentage point, from 2.2 percent in 2007 to 1.2 percent in 2009, giving rise to the “missing deflation” puzzle. Based on this evidence, some authors have argued that slack must have been smaller than suggested by indicators such as the unemployment rate or deviations of GDP from its long-run trend. On the contrary, in Monday’s post, we showed that a New Keynesian DSGE model can explain the behavior of inflation in the aftermath of the Great Recession, despite large and persistent output gaps. An implication of this model is that information about the future stance of monetary policy is very important in determining current inflation, in contrast to backward-looking Phillips curve models where all that matters is the current and past stance of policy.

Continue reading "Why Didn’t Inflation Collapse in the Great Recession?" »

Posted by Blog Author at 7:00 AM in Fiscal Policy, Macroecon, Monetary Policy | Permalink | Comments (4)

August 11, 2014

Inflation in the Great Recession and New Keynesian Models



Since the financial crisis of 2007-08 and the Great Recession, many commentators have been baffled by the “missing deflation” in the face of a large and persistent amount of slack in the economy. Some prominent academics have argued that existing models cannot properly account for the evolution of inflation during and following the crisis. For example, in his American Economic Association presidential address, Robert E. Hall called for a fundamental reconsideration of Phillips curve models and their modern incarnation—so-called dynamic stochastic general equilibrium (DSGE) models—in which inflation depends on a measure of slack in economic activity. The argument is that such theories should have predicted more and more disinflation as long as the unemployment rate remained above a natural rate of, say, 6 percent. Since inflation declined somewhat in 2009, and then remained positive, Hall concludes that such theories based on a concept of slack must be wrong.

Continue reading "Inflation in the Great Recession and New Keynesian Models" »

Posted by Blog Author at 7:00 AM in Financial Markets, Macroecon, Monetary Policy | Permalink | Comments (1)

August 04, 2014

Financial Stability Monitoring




In a recently released New York Fed staff report, we present a forward-looking monitoring program to identify and track time-varying sources of systemic risk. Our program distinguishes between shocks, which are difficult to prevent, and the vulnerabilities that amplify shocks, which can be addressed. Drawing on a substantial body of research, we identify leverage, maturity transformation, interconnectedness, complexity, and the pricing of risk as the primary vulnerabilities in the financial system. The monitoring program tracks these vulnerabilities in four sectors of the economy: asset markets, the banking sector, shadow banking, and the nonfinancial sector. The framework also highlights the policy trade-off between reducing systemic risk and raising the cost of financial intermediation by taking pre-emptive actions to reduce vulnerabilities.

Continue reading "Financial Stability Monitoring" »

July 16, 2014

Risk Aversion and the Natural Interest Rate

Bianca De Paoli and Pawel Zabczyk

One way to assess the stance of monetary policy is to assert that there is a natural interest rate (NIR), defined as the rate consistent with output being at its potential. Broadly speaking, monetary policy can be seen as expansionary if the policy rate is below the NIR with the gap between the rates measuring the extent of the policy stimulus. Of course, there are many challenges in defining and measuring the NIR, with various factors driving its value over time. A key factor that needs to be considered is the effect of uncertainty and risk aversion on households’ savings decisions. Households’ tolerance for risk tends to be lower during downturns, putting upward pressure on precautionary savings, and thereby downward pressure on the natural interest rate. In addition, uncertainty dictates how much precautionary savings responds to changes in risk aversion. So policymakers need to be aware that rate moves to offset adverse economic conditions that are appropriate in tranquil times may not be sufficient in times of high uncertainty.

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Posted by Blog Author at 7:00 AM in Macroecon, Monetary Policy | Permalink | Comments (1)

April 17, 2014

Just Released: The 2013 SOMA Annual Report in a Historical Context

Alyssa Cambron, Michael Fleming, Deborah Leonard, Grant Long, and Julie Remache

In August 2013, we wrote a series of blog posts on the use of the Federal Reserve’s System Open Market Account (SOMA) portfolio in monetary policy operations. Since the onset of the financial crisis, the Federal Open Market Committee (FOMC) has increased the size and adjusted the composition of the SOMA portfolio in efforts to promote the Committee’s mandate to foster maximum employment and price stability. Over time, these actions have also generated high levels of portfolio income, contributing in turn to elevated remittances to the U.S. Treasury. Today’s release of the New York Fed’s report Domestic Open Market Operations during 2013 offers an opportunity to update our blog series’ discussion of the portfolio’s income and unrealized gains and losses, and to revisit our counterfactual exercise exploring how the use of the portfolio to implement monetary policy has affected income.

Continue reading "Just Released: The 2013 SOMA Annual Report in a Historical Context " »

Posted by Blog Author at 12:00 PM in Financial Markets, Monetary Policy | Permalink | Comments (2)

March 05, 2014

Risk Aversion, Global Asset Prices, and Fed Tightening Signals

Jan Groen and Richard Peck

The global sell-off last May of emerging market equities and currencies of countries with high interest rates (“carry-trade” currencies) has been attributed to changes in the outlook for U.S. monetary policy, since the sell-off took place immediately following Chairman Bernanke’s May 22 comments concerning the future of the Fed’s asset purchase programs. In this post, we look back at global asset market developments over the past summer, and measure how changes in global risk aversion affected the values of carry-trade currencies and emerging market equities between May and September of last year. We find that the initial signal of a possible change in U.S. monetary policy coincided with an increase in global risk aversion, which put downward pressure on global asset prices.

Continue reading "Risk Aversion, Global Asset Prices, and Fed Tightening Signals " »

March 03, 2014

How Unconventional Are Large-Scale Asset Purchases?

Carlo Rosa and Andrea Tambalotti

The large-scale asset purchases (LSAPs) undertaken by the Fed starting in late November 2008 are widely considered to be a form of “unconventional” monetary policy. Although these interventions are certainly unprecedented, this post shows that their effect on financial conditions is not that unconventional, in the sense that the relative effects of the LSAPs on returns across broad asset classes—nominal and real government bonds, stocks, and foreign exchange—are quite similar to those of more conventional policies, such as a reduction in the federal funds rate (FFR).

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Posted by Blog Author at 7:00 AM in Financial Markets, Monetary Policy | Permalink | Comments (0)

December 09, 2013

Who’s Borrowing in the Fed Funds Market?

Gara Afonso, Alex Entz, and Eric LeSueur

The federal funds market plays an important role in the implementation of monetary policy. In our previous post, we examine the lending side of the fed funds market and the decline in total fed funds volume since the onset of the financial crisis. In today’s post, we discuss the borrowing side of this market and the interesting role played by foreign banks.


Continue reading "Who’s Borrowing in the Fed Funds Market?" »

December 05, 2013

Introducing the FRBNY Survey of Consumer Expectations: Labor Market Expectations

Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar

Note: We aren’t releasing the underlying data yet, but we’ll be making them available to the public sometime in first-quarter 2014. So please stay tuned.

In the previous two blog postings in this series, we described the goals, structure, and content of the new FRBNY Survey of Consumer Expectations (SCE) and presented some findings regarding inflation expectations. In this third posting, we focus on the labor market component of the SCE.

Continue reading "Introducing the FRBNY Survey of Consumer Expectations: Labor Market Expectations" »

Posted by Blog Author at 7:00 AM in Household Finance, Monetary Policy | Permalink | Comments (0)

December 04, 2013

Introducing the FRBNY Survey of Consumer Expectations: Measuring Price Inflation Expectations

Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar

Note: We aren’t releasing the underlying data yet, but we’ll be making them available to the public sometime in first-quarter 2014. So please stay tuned.

In this second of a series of four blog postings, we discuss the data on inflation expectations collected in our new FRBNY Survey of Consumer Expectations (SCE). Inflation expectations are a key consideration for monetary policy as they are believed to influence consumer behavior, thereby affecting economic activity and actual inflation. The SCE data on inflation expectations represent a major innovation as they contain information not previously collected from consumers on a regular basis. In this post, we provide some background on the survey and present some initial findings.

Continue reading "Introducing the FRBNY Survey of Consumer Expectations: Measuring Price Inflation Expectations" »

Posted by Blog Author at 7:05 AM in Household Finance, Monetary Policy | Permalink | Comments (0)
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