Assessing the Powell policy review

To understand both how it controls inflation and how it trades off inflation with its goal of maximum employment, the Federal Reserve System uses a Keynesian framework in which monetary policy moves the unemployment rate relative to a presumed full employment value, termed the NAIRU (non‐accelerating inflation rate of unemployment). Because it does not know the value of the NAIRU, it pursues an expansionary monetary policy until inflation rises. This policy risks reviving the inflationary monetary policy of the 1970s.     

Decomposing the effects of monetary policy using an external instruments SVAR

We study the effects of monetary policy on economic activity separately identifying the effects of a conventional change in the fed funds rate from the policy of forward guidance. We use a structural VAR identified using external instruments from futures market data. The response of output to a fed funds rate shock is found to be consistent with typical monetary VAR analyses. However, the effect of a forward guidance shock that increases long‐term interest rates has an expansionary effect on output. This counterintuitive response is shown to be tied to the asymmetric information between the Federal Reserve and the public.     

The evolution of U.S. monetary policy: 2000–2007

A vector autoregression with time-varying parameters is used to characterize changes in Federal Reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the U.S. economy. Declining coefficients in the model׳s estimated policy rule point to a shift in the Fed׳s emphasis away from stabilizing inflation over this period. More importantly, however, the Fed held the federal funds rate persistently below the values prescribed by this rule. Under this more discretionary policy, inflation overshot its target and the funds rate followed a path reminiscent of the “stop-go” pattern that characterized Fed behavior prior to 1979.     

Nonlinearities and Fractional Integration in the US Unemployment Rate*

This paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework, using a Lagrange multiplier procedure with a standard null‐limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some nonlinear functions of labour‐demand variables such as real oil prices and real interest rates. We also find evidence of a long‐memory component. Our results are consistent with a hysteresis model with path dependency rather than a non‐accelerating inflation rate of unemployment (NAIRU) model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilization policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy‐making.     

Anticipating Long‐Term Stock Market Volatility

We investigate the relationship between long‐term US stock market risks and the macroeconomic environment using a two‐component GARCH‐MIDAS model. Our results show that macroeconomic variables are important determinants of the secular component of stock market volatility. Among the various macro variables in our dataset the term spread, housing starts, corporate profits and the unemployment rate have the highest predictive ability for long‐term stock market volatility. While the term spread and housing starts are leading variables with respect to stock market volatility, for industrial production and the unemployment rate expectations data from the Survey of Professional Forecasters regarding the future development are most informative. Copyright © 2014 John Wiley & Sons, Ltd.     

The Effect of Incomes Policies on Inflation in Bulgaria and Poland

Transition countries, and many other countries with incomplete markets, have faced long periods with both high inflation and unemployment. Policies to reduce inflation without high unemployment include incomes policies, which were widely employed in transition countries. This paper studies the effects of incomes policies on inflation in Bulgaria and Poland in 1990-1993. The actual policies, which were complex and changing, are examined. The policies do not appear well-designed in a technical sense to reduce inflation. A time-series analysis is made which includes standard determinants of inflation including past inflation, wage increases, exchange rate changes, and monetary changes, plus a dummy for incomes policies. The regressions are fairly successful in fitting standard factors that should influence inflation, particularly the exchange rate and unemployment in Bulgaria and wages and unemployment in Poland. They find a fairly substantial inflation-reducing effect from the Bulgarian policy but no significant results from the Polish policy. This revised version was published online in July 2006 with corrections to the Cover Date.     

Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear effect of monetary policy on stock returns. The change in the Federal funds rate is used as an endogenous measure of monetary policy, and the growth rate of industrial production is also considered in the model. Our results show that the relationship between the monetary policy and excess returns on stock prices is positive and nonlinear. A decrease in the Federal funds rate causes a larger increase in excess returns if excess stock returns are located in the extreme low excess returns regime.     

Time‐varying yield curve dynamics and monetary policy

Monetary policy, the yield curve and the private sector behaviour of the US economy are modelled as a time‐varying structural vector autoregression. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the term structure. Changes in inflation expectations implied by the yield curve account for the persistence of the federal funds rate. Failures of the expectations hypothesis are rare, and coincided with the credibility building of Paul Volcker's Fed tenure at the beginning of the 1980s and the sequence of consecutive policy rate cuts around the time of the early 1990s recession. Copyright © 2009 John Wiley & Sons, Ltd.     

Inferring Policy Objectives from Economic Outcomes*

Estimated policy rules are reduced‐form equations that are silent on many important policy questions. However, a structural understanding of monetary policy can be obtained by estimating a policymaker's objective function. The paper derives conditions under which the parameters in a policymaker's policy objective function can be identified and estimated. We apply these conditions to a New Keynesian sticky‐price model of the US economy. The results show that the implicit inflation target and the relative weight placed on interest rate smoothing both declined when Paul Volcker was appointed Federal Reserve chairman.     

Long‐term rates: lower for longer

With the Federal Reserve and other central banks likely to start raising interest rates from next year, the focus is now on how high interest rates might ultimately go. Long‐term analysis of the path of interest rates in the world's main economies suggests that interest rates tend over time to gravitate towards a level reflecting long‐run growth and inflation. But there is scope for real interest rates to depart substantially from growth for lengthy periods of time. Based on our long‐run forecasts for growth and inflation we take the view that long‐term interest rates are likely to settle in at levels a bit lower than their recent historic averages. Structural changes in the world economy and vulnerabilities in the advanced economies are also likely to slow the process by which long‐term rates rise from current levels to their steady state positions. OE forecasts for long‐term rates in the major economies are generally lower at the 1‐year and long‐term horizons than consensus.     

Uncovering financial markets' beliefs about inflation targets

This paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long‐term interest rates and inflation when the latter is subject to a targeting policy by the central bank. In an empirical application to the Canadian inflation target zone, results indicate that financial markets perceive the band to be of approximately the same width as announced but asymmetrically distributed around the official target. This finding suggests that, in practice, the monetary authority might attach different weights to positive and negative inflation deviations from the target. Copyright © 2000 John Wiley & Sons, Ltd.     

Transfer payments and the Phillips Curve

Policy makers are today confronted with a worsening relationship between inflation and unemployment. Voluminous economic literature on the “Phillips Curve” has long attempted to show why inflation and unemployment are normally inversely correlated. More recent literature has sought to identify factors that could worsen the apparent tradeoff. This paper uses the labor sector of the System Dynamics National Model to analyze the potential impacts of increased transfer payments on inflation and unemployment. The results suggest that in the short run, higher transfer payments can prolong job search, thereby boosting unemployment, while simultaneously driving up wages due to reduced labor availability. But over the longer term, rising wages raise the attrractiveness of working, thereby compensating for higher transfer payments. Therefore, higher transfer payments are not permanently inflationary. Key long-run impacts of transfer payments may be to raise relative costs of labor, thereby lowering employment through factor substitution, and to discourage dropout from the labor force so as to maintain eligibility for payments.     

The Costs and Benefits of Cutting Inflation

In recent speeches Treasury Ministers have coined a new slogan. They argue that inflation is not an alternative to high unemployment but a fundamental cause of it. They use this slogan to attack those who suggest that thefight against inflation should be slackened - at least briefly - in order to reduce unemployment. In this Economic e iewpoint we examine the arguments about the relation between inflation and unemployment. We suggest that although inflation may be a cause of unemployment in the long term there is an inescapable short-term choice to be made between reducing unemployment and reducing inflation. We explain why this choice arises and also discuss the longer-term effects of counter-inflationary policies. Finally we examine the record of this Government's policies so far.     

从沃尔克的反通货膨胀看降低通货膨胀的权衡取舍

通货膨胀将对国民经济带来巨大的风险,决策者有责任抑制通货膨胀,然而菲利普斯曲线揭示了降低通货膨胀是以增加短期失业为代价的。文章通过分析上世纪八十年代美联储主席保罗.沃尔克的反通货膨胀,对决策者降低通货膨胀所面临的权衡取舍以及如何使代价最小化进行探讨。     

PHILLIPS CURVES AND UNEMPLOYMENT DYNAMICS: A CRITIQUE AND A HOLISTIC PERSPECTIVE

Abstract.  The conventional wisdom that inflation and unemployment are unrelated in the long run implies the compartmentalization of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve, we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation–unemployment trade-off in the long run. We thus argue that a holistic framework, such as the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions.     

UK term structure decompositions at the zero lower bound

This paper employs a zero lower bound (ZLB) consistent shadow‐rate model to decompose UK nominal yields into expectation and term premium components. Compared to a standard affine term structure model, it performs relatively better in a ZLB setting by capturing the stylized facts of the yield curve. The ZLB model is then exploited to estimate inflation expectations and risk premiums. This entails jointly pricing and decomposing nominal and real UK yields. We find evidence that medium‐ and long‐term inflation expectations are contained within narrower bounds since the early 1990s, suggesting monetary policy credibility improved after the introduction of inflation targeting.     

Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK*

During the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non‐accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s.     

Structural evolution of the postwar U.S. economy

We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.     

Do enlarged fiscal deficits cause inflation? The historical record

We survey the historical record for two centuries on the connection between expansionary fiscal policy and inflation. The relationship holds in wartime when fiscally stressed governments resorted to the inflation tax. In two peacetime episodes in the early twentieth century, bond‐financed fiscal deficits, unbacked by future taxes, may have contributed to inflation. Fiscal influence on monetary policy was important in the Great Inflation 1965–1983. Expansionary monetary and fiscal policy did not lead to inflation in the Global Financial Crisis of 2007–08 but, by contrast, the fiscal and monetary response to the COVID‐19 pandemic may involve risks of fiscal dominance and future inflation.