Federal Reserve System

About: Federal Reserve System is a other organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 2373 authors who have published 10301 publications receiving 511979 citations.

Term Structure Estimation with Survey Data on Interest Rate Forecasts

Abstract: The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

The New IS-LM Model: Language, Logic, and Limits

Abstract: Recent years have witnessed the development of a New IS-LM model that is increasingly being used to discuss the determination of macroeconomic activity and the design of monetary policy rules. It is sometimes called an “optimizing IS-LM model” because it can be built up from microfoundations. It is alternatively called an “expectational IS-LM model” because the traditional model’s behavioral equations are modified to include expectational terms suggested by these microfoundations and because the new framework is analyzed using rational expectations. The purpose of this article is to provide a simple exposition of the New IS-LM model and to discuss how it leads to strong conclusions about monetary policy in four important areas. • Desirability of price level or inflation targeting: The new model suggests that a monetary policy that targets inflation at a low level will keep economic activity near capacity. If there are no exogenous “inflation shocks,” then full stabilization of the price level will also maintain output at its capacity level. More generally, the new model indicates that time-varying inflation targets should not respond to many economic disturbances, including shocks to productivity, aggregate demand, and the demand for money. • Interest rate behavior under inflation targeting: The new model incorporates the twin principles of interest rate determination, originally developed by Irving Fisher, which are an essential component of modern macroeconomics. The real interest rate is a key intertemporal relative

Overcoming the zero bound on interest rate policy

Abstract: The paper proposes three options for overcoming the zero bound on interest rate policy: a carry tax on money, open market operations in long bonds, and monetary transfers. A variable carry tax on electronic bank reserves could enable a central bank to target negative nominal interest rates. A carry tax could be imposed on currency to create more leeway to make interest rates negative. Quantitative policy--monetary transfers and open market purchases of long bonds--could stimulate the economy by creating liquidity broadly defined. A central bank needs more fiscal support than usual from the Treasury to pursue quantitative policy at the interest rate floor.