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58 posts on "Monetary Policy"

November 05, 2014

Forecasting Inflation with Fundamentals . . . It’s Hard!



Controlling inflation is at the core of monetary policymaking, and central bankers would like to have access to reliable inflation forecasts to assess their progress in achieving this goal. Producing accurate inflation forecasts, however, turns out not to be a trivial exercise. This posts reviews the key challenges in inflation forecasting and discusses some recent developments that attempt to deal with these challenges.

Continue reading "Forecasting Inflation with Fundamentals . . . It’s Hard!" »

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

September 29, 2014

Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks

Kenneth D. Garbade

From time to time, and most recently in the April 2014 meeting of the Treasury Borrowing Advisory Committee, U.S. Treasury officials have questioned whether the Treasury should have a safety net that would allow it to continue to meet its obligations even in the event of an unforeseen depletion of its cash balances. (Cash balances can be depleted by an unanticipated shortfall in revenues or a spike in disbursements, an inability to access credit markets on a timely basis, or an auction failure.) The original version of the Federal Reserve Act provided a robust safety net because the act implicitly allowed Reserve Banks to buy securities directly from the Treasury. This post reviews the history of the Fed’s direct purchase authority. (A more extensive version of the post appears in this New York Fed staff report.)

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Posted by Blog Author at 7:00 AM in Financial Institutions, Monetary Policy | Permalink | Comments (2)

September 26, 2014

The FRBNY DSGE Model Forecast



Fifth in a five-part series
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts. The U.S. economy has been in a gradual but slow recovery. Will the future be more of the same? This post presents the current forecasts from the Federal Reserve Bank of New York’s (FRBNY) DSGE model, described in our earlier “Bird’s Eye View” post, and discusses the driving forces behind the forecasts. Find the code used for estimating the model and producing all the charts in this blog series here. (We should reiterate that these are not the official New York Fed staff forecasts, but only an input to the overall forecasting process at the Bank.)

Continue reading "The FRBNY DSGE Model Forecast" »

Posted by Blog Author at 10:00 AM in Macroecon, Monetary Policy | Permalink | Comments (3)

September 25, 2014

Connecting “the Dots”: Disagreement in the Federal Open Market Committee



People disagree, and so do the members of the Federal Open Market Committee (FOMC). How much do they disagree? Why do they disagree? We look at the FOMC’s projections of the federal funds rate (FFR) and other variables and compare them with those in the New York Fed’s Survey of Primary Dealers (SPD). We show that the members of the FOMC tend to disagree more than the primary dealers and offer some potential explanations.


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Posted by Blog Author at 7:05 AM in Macroecon, Monetary Policy | Permalink | Comments (1)

An Assessment of the FRBNY DSGE Model's Real-Time Forecasts, 2010-13



Fourth in a five-part series
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts. The previous post in this series showed how the Federal Reserve Bank of New York’s DSGE model can be used to provide an interpretation of the Great Recession and the slow recovery. In this post, we look at the role of the model as a forecasting tool and evaluate its forecasting performance since 2010. This analysis will give context for the last post, which will present the model’s current forecast for the U.S. economy.

Continue reading "An Assessment of the FRBNY DSGE Model's Real-Time Forecasts, 2010-13" »

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

September 24, 2014

Developing a Narrative: The Great Recession and Its Aftermath



Third in a five-part series
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts. The severe recession experienced by the U.S. economy between December 2007 and June 2009 has given way to a disappointing recovery. It took three and a half years for GDP to return to its pre-recession peak, and by most accounts this broad measure of economic activity remains below trend today. What precipitated the U.S. economy into the worst recession since the Great Depression? And what headwinds are holding back the recovery? Are these headwinds permanent, calling for a revision of our assessment of the economy’s speed limit? Or are they transitory, although very long-lasting, as the historical record on the persistent damages inflicted by financial crisis seems to suggest? In this post, we address these questions through the lens of the FRBNY DSGE model.

Continue reading "Developing a Narrative: The Great Recession and Its Aftermath" »

Posted by Blog Author at 7:00 AM in Macroecon, Monetary Policy | Permalink | Comments (5)

September 23, 2014

A Bird’s Eye View of the FRBNY DSGE Model



Second in a five-part series
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts. Dynamic stochastic general equilibrium (DSGE) models provide a stylized representation of reality. As such, they do not attempt to model all the myriad relationships that characterize economies, focusing instead on the key interactions among critical economic actors. In this post, we discuss which of these interactions are captured by the FRBNY model and describe how we quantify them using macroeconomic data. For more curious readers, this New York Fed working paper provides much greater detail on these and other aspects of the model.

Continue reading "A Bird’s Eye View of the FRBNY DSGE Model" »

Posted by Blog Author at 7:00 AM in Macroecon, Monetary Policy | Permalink | Comments (2)

September 22, 2014

Forecasting with the FRBNY DSGE Model



First in a five-part series
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts. The Federal Reserve Bank of New York (FRBNY) has built a DSGE model as part of its efforts to forecast the U.S. economy. On Liberty Street Economics, we are publishing a weeklong series to provide some background on the model and its use for policy analysis and forecasting, as well as its forecasting performance. In this post, we briefly discuss what DSGE models are, explain their usefulness as a forecasting tool, and preview the forthcoming pieces in this series.

Continue reading "Forecasting with the FRBNY DSGE Model" »

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

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)
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