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.

Evaluating Correlation Breakdowns during Periods of Market Volatility

Abstract: Financial market observers have noted that during periods of high market volatility, correlations between asset prices can differ substantially from those seen in quieter markets. For example, correlations among yield spreads were substantially higher during the fall of 1998 than in earlier or later periods. Such changes in correlations could reflect changes in the underlying distribution of returns or "contagion" across markets that is present only during periods of market turbulence. However, as noted by Boyer, Gibson and Loretan (1999), increases in the volatility of returns are generally accompanied by an increase in sampling correlations even when the true correlations are constant. We show that this result is not just of theoretical interest: When we consider quarterly measures of volatility and correlation for three pairs of asset returns, we find that the theoretical relationship can explain much of the movement in correlations over time. We then examine the implications of this link between measures of volatility and correlation for risk management, bank supervision, and monetary policy making.

Are Higher Levels of Inflation Less Predictable? A State-Dependent Conditional Heteroscedasticity Approach

Abstract: Milton Friedman proposed that there is a positive relationship between inflation and uncertainty about the future path of inflation. In contrast to previous studies of this hypothesis, we find strong statistical evidence that higher levels of inflation are less predictable, although innovations in inflation are somewhat better predictors of future volatility than the actual level of inflation. We argue that previous failures to find an inflation-uncertainty relationship are due to two factors. First, none of the previous work directly tested Friedman's hypothesis by including the level of inflation in the model of the conditional variance. Second, these studies also used symmetric models, which appears inconsistent with Friedman's hypothesis. Our results are robust to different sample periods and to assumptions about the presence of a unit root in inflation. To test the inflation-uncertainty hypothesis, we use state-dependent models (SDM's) of conditional moments to estimate the time-varying conditional v...

Unemployment Equilibria and Input Prices: Theory and Evidence from the United States

Abstract: The paper develops an efficiency-wage model where input prices affect the equlibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S. joblessnss. The equations do well in forecasting unemployment many out-of-sample, and provide evidence that the oil price spike associated with Iraq's invasion of Kuweit appears to be a component of the "mystery" recession which followed.

Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States?

Abstract: This paper compares the evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well anchored in both economies but reveal substantially greater dispersion across forecasters' long-horizon projections of US inflation. Analysis of daily data on inflation swaps and nominal-indexed bond spreads, which gauge compensation for expected inflation and inflation risk, also suggests that long-run inflation expectations are more firmly anchored in the euro area than in the United States. (JEL D84, E31,