Federal Reserve Bank of Dallas

About: Federal Reserve Bank of Dallas is a other organization based out in Dallas, Texas, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 196 authors who have published 994 publications receiving 35508 citations.

The Effect of Commodity Price Shocks on Underlying Inflation: The Role of Central Bank Credibility

Abstract: This paper seeks to document and explain the effect of a commodity price shock on underlying core inflation, and how that effect changes both across time and across countries. Impulse responses derived from a structural VAR model show that across many countries there was a break in the response of core inflation to a commodity price shock. In an earlier period, a shock to commodity prices would lead to a large and significant increase in core inflation, but in later periods, the effect was insignificant. To explain this, we construct a large-scale DSGE model with both headline and core inflation, and most significantly, a mechanism whereby fluctuations in inflation caused by purely transitory shocks can become incorporated into long-term inflation expectations. Inflation has a trend and a cyclical component. Private agents cannot distinguish between the two, so a cyclical fluctuation in inflation may be confused for a shift in the trend component. Bayesian estimation reveals that there was a change between the earlier and the later periods in the parameter that governs the anchoring of expectations. Impulse responses derived from simulations of the model show that this change in the effect of commodity prices on core inflation is driven by the change in the anchoring of inflation expectations.

Assessing Bayesian Model Comparison in Small Samples

Abstract: We investigate the Bayesian approach to model comparison within a two-country framework with nominal rigidities using the workhorse New Keynesian open-economy model of Martinez-Garcia and Wynne (2010). We discuss the trade-offs that monetary policy — characterized by a Taylor-type rule — faces in an interconnected world, with perfectly flexible exchange rates. We then use posterior model probabilities to evaluate the weight of evidence in support of such a model when estimated against more parsimonious specifications that either abstract from monetary frictions or assume autarky by means of controlled experiments that employ simulated data. We argue that Bayesian model comparison with posterior odds is sensitive to sample size and the choice of observable variables for estimation. We show that posterior model probabilities strongly penalize overfitting, which can lead us to favor a less parameterized model against the true data-generating process when the two become arbitrarily close to each other. We also illustrate that the spill-overs from monetary policy across countries have an added confounding effect.The Technical Note for this paper is available at the following URL: http://ssrn.com/abstract=2485465

A Monetary Model of the Exchange Rate with Informational Frictions

Abstract: Data for the U.S. and the Euro-area during the post-Bretton Woods period shows that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Standard models with nominal rigidities match reasonably well the volatility and persistence of the nominal exchange rate, but require an average contract duration above 4 quarters to approximate the real exchange rate counterparts. I propose a two-country model with financial intermediaries and argue that: First, sticky and asymmetric information introduces a lag in the consumption response to currently unobservable shocks, mostly foreign. Accordingly, the real exchange rate becomes more volatile to induce enough expenditure-switching across countries for all markets to clear. Second, differences in the degree of price stickiness across markets and firms weaken the correlation between the nominal exchange rate and the relative CPI price. This correlation is important to match the moments of the real exchange rate. The model suggests that asymmetric information and differences in price stickiness account better for the stylized facts without relying on an average contract duration for the U.S. larger than the current empirical estimates.

The trade comovement problem in international macroeconomics

Abstract: Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: Complete markets and international financial autarky. Our main finding is that under international financial autarky the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. In our benchmark calibrations, the model explains at most 6 percent of the responsiveness of GDP correlations to trade found in the empirical research. This result is robust to many combinations of shock specifications, import shares, and elasticities of substitution. Because the difference between business cycle theory and the empirical results cannot be resolved by changes in parameter values and the structure of the standard models, we call this discrepancy the trade comovement problem.