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.

Were there regime switches in U.S. monetary policy

Abstract: Working Paper 2004-14 June 2004 Abstract: A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with U.S. data since 1959. The best fit is with a model that allows time variation in structural disturbance variances only. Among models that also allow for changes in equation coefficients, the best fit is for a model that allows coefficients to change only in the monetary policy rule. That model allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, and the differences in policy behavior are substantively interesting, though statistically ill determined. The estimates imply monetary targeting was central in the early '80s but was also important sporadically in the '70s. The changes in regime were essential neither to the rise in inflation in the '70s nor to its decline in the '80s. JEL classification: E52, E47, C53 Key words: counterfactuals, Lucas critique, policy rule, monetary targeting, simultaneity, volatility, model comparison I. THE DEBATE OVER MONETARY POLICY CHANGE In an influential paper, Clarida, Gali and Gertler 2000 (CGG) presented evidence that US monetary policy changed between the 1970's and the 1980's, indeed that in the 70's it was drastically worse. They found that the policy rule apparently followed in the 70's was one that, when embedded in most stochastic general equilibrium models, would imply non-uniqueness of the equilibrium and hence vulnerability of the economy to "sunspot" fluctuations of arbitrarily large size. Their estimated policy rule for the later period, on the other hand, eliminated this indeterminacy. These results are a possible explanation of the volatile and rising inflation of the 70's and of its subsequent decline. The CGG analysis has two important weaknesses. One is that it fails to account for stochastic volatility. US macroeconomic variables, and particularly the federal funds rate, have gone through periods of tranquility and of agitation, with forecast error variances varying greatly from period to period. Ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant, but it strongly biases--toward a finding of changed parameters--tests of the stability of the forecasting equations. The other weakness is that the CGG analysis rests on powerful and implausible identifying assumptions. They require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation, money growth, or output. It is hard to understand why this should be so, especially in the 70's, when monetarism was a prominent theme in policy debates, Congress was requiring reports from the Fed of projected time paths of monetary aggregates, and financial markets were reacting sensitively to weekly money supply numbers. The requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right-hand side of the reaction function. If we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function, we are bound to get distorted conclusions. On the one hand, because expected future inflation will be a "noisy" measure of the full set of nominal influences on policy, we might get downward bias in our estimates from the usual errorsin-variables effect. On the other hand, to the extent that expected future inflation (like most expected future values) shows less variation than current nominal variables, we could find a mistaken scaling up of coefficients. …

Workers, Wages, and Technology

Abstract: This paper documents how plant-level wages, occupational mix, workforce education, and productivity vary with the adoption and use of new factory automation technologies such as programmable controllers, computer-automated design, and numerically controlled machines. Our cross-sectional results show that plants that use a large number of new technologies employ more educated workers, employ relatively more managers, professionals, and precision-craft workers, and pay higher wages. However, our longitudinal analysis shows little correlation between skill upgrading and the adoption of new technologies. It appears that plants that adopt new factory automation technologies have more skilled workforces both pre- and postadoption.

European Inflation Dynamics

Abstract: We provide evidence on the fit of the New Phillips Curve (NPQ for the Euro area over the period 1970-1998, and use it as a tool to compare the characteristics of European inflation dynamics with those observed in the U.S. We also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs, as well as that of its two main components, namely, labor productivity and real wages. Some of the findings can be summarized as follows: (a) the NPC fits Euro area data very well, possibly better than U.S. data, (b) the degree of price stickiness implied by the estimates is substantial, but in line with survey evidence and U.S. estimates, (c) inflation dynamics in the Euro area appear to have a stronger forward- looking component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested in the behavior of the wage markup, appear to have played a key role in shaping the behavior of marginal costs and, consequently, inflation in Europe.

The Unreliability of Output Gap Estimates in Real Time

Abstract: We examine the reliability of alternative output detrending methods, with special attention to the accuracy of real-time estimates of the output gap. We show that ex post revisions of the estimated gap are of the same order of magnitude as the estimated gap itself and that these revisions are highly persistent. Although important, the revision of published data is not the primary source of revisions in measured output gaps; the bulk of the problem is due to the pervasive unreliability of end-of-sample estimates of the trend in output. Multivariate methods that incorporate information from inflation to estimate the output gap are not more reliable than their univariate counterparts.