Vasco Cúrdia

Senior Economist

Macroeconomic Research

Macroeconomics, Monetary economics, Time series econometrics

Vasco.Curdia (at) sf.frb.org

CV

Vasco Cúrdia, Senior Economist, Federal Reserve Bank San Francisco

Show less Current Unpublished Working Papers

Correlated Disturbances and U.S. Business Cycles
FRBNY Staff Report 434 | With Reis | February 2010

+ abstract
The dynamic stochastic general equilibrium (DSGE) models used to study business cycles typically assume that exogenous disturbances are independent first-order autoregressions. This paper relaxes this tight and arbitrary restriction by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to allow for feasible and quick estimation of DSGE models with correlated disturbances. Our second contribution is a reexamination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.

Optimal Monetary Policy under Sudden Stops
FRBNY Staff Report 323 | April 2009

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Emerging market economies often face sudden stops in capital inflows or reduced access to the international capital market, a development that can cause serious disruptions in economic activity. This paper analyzes what monetary policy can accomplish in such an event. Optimal monetary policy exploits export revenues to minimize the impact on the domestic economy. However, this approach will not completely insulate the economy from some contraction. Domestic currency depreciation combined with high interest rates is needed to achieve this result. The paper shows that the arrival of the sudden stop further aggravates the time inconsistency problem. Optimal policy is fairly well approximated by a flexible targeting rule, which stabilizes a basket composed of domestic price inflation, exchange rate, and output. For some parameterizations, the best rule can be specified as an interest rate rule that responds to the natural interest rate, inflation, output, and exchange rate depreciation. We further show that from a welfare perspective, the desirability of a fixed exchange rate regime depends on the economic environment.

Credit Frictions and Optimal Monetary Policy
WP BIS 278 | With Woodford | March 2009

+ abstract
We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion  a linear relation that should be maintained between the inflation rate and changes in the output gap that characterises optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a spread-adjusted Taylor rule, in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.

Monetary Policy under Sudden Stops
FRBNY Staff Report 278 | March 2007

+ abstract
This paper proposes a model to investigate the effects of monetary policy in an emerging market economy that experiences a sudden stop of capital inflows. The model features credit frictions, debt denominated in foreign currency, imported inputs, and households that have access to the international capital market only indirectly, through their ownership of leveraged firms. The sudden stop is modeled as a change in the perceptions of foreign lenders that brings about an increase in the cost of borrowing. I show that the higher the elasticity of foreign demand, the lower the contraction in output—leading, at the extreme, to the possibility of an expansion, depending on policy. A second result is that the recession is most severe in a fixed exchange rate regime. Taylor rules that react to inflation and output are more stabilizing. A comparison of alternative rules shows that low commitment to inflation stabilization allows for less contraction in output and even expansion but at the cost of much stronger contraction in capital inflows and higher interest rates. Credibility is also shown to have an important role, with low credibility and the risk of loose policy implying increased trade-offs, stronger contraction of the economy, and higher interest rates.

Linear Quadratic Approximation of Optimal Policy: An Algorithm and Two Applications
Unpublished manuscript | With Altissimo and Rodriguez-Palenzuela | September 2005

+ abstract
This paper aims at bridging the gap between recent theoretical progress in welfare- based optimal policy and its application to models suitable for policy analysis. With this purpose, the framework of Benigno and Woodford (2005b) with a linear-quadratic (LQ) approximation (in a timeless perspective) to the optimal policy problem is applied to monetary policy in two relatively standard models. Furthermore the applications are performed through a standardised algorithm that is suitable for being implemented for a broad class of models.

Show less Published Articles (Refereed Journals and Volumes)

Has U.S. Monetary Policy Tracked the Efficient Interest Rate?
Forthcoming in Journal of Monetary Economics | With Ferrero, Ng, and Tambalotti

+ abstract
Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to the measurement of the output gap. Moreover, it is robust across two different models of private agents’ behavior.
+ supplement
wp2014-12appendix.pdf – Online Appendix to Working Paper 2014-12

Rare Shocks, Great Recessions
Journal of Applied Econometrics, 2014 | With Del Negro and Greenwald

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We estimate a DSGE (dynamic stochastic general equilibrium) model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student’s t-distribution. Results from the Smets and Wouters (American Economic Review 2007; 97: 586–606) model estimated on the usual set of macroeconomic time series over the 1964–2011 period indicate that (i) the Student’s t specification is strongly favored by the data even when we allow for low-frequency variation in the volatility of the shocks, and (ii)) the estimated degrees of freedom are quite low for several shocks that drive US business cycles, implying an important role for rare large shocks. This result holds even if we exclude the Great Recession period from the sample. We also show that inference about low-frequency changes in volatility—and, in particular, inference about the magnitude of Great Moderation—is different once we allow for fat tails.

BASEL III: Long-Term Impact on Economic Performance and Fluctuations
The Manchester School, 2014 | With Angelini, Clerc, Gambacorta, Gerali, Locarno, Motto, Roeger, Van den Heuvel, and Vlcek

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We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions: 1) What is the impact of the reform on long-term economic performance? 2) What is the impact of the reform on economic fluctuations? 3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following: 1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady-state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analyzed in Basel Committee on Banking Supervision (2010b). 2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. 3) The adoption of countercyclical capital buffers could have a more sizable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact Group (Basel Committee on Banking Supervision 2010b) and the Macroeconomic Assessment Group (2010b).

Monetary Regime Change and Business Cycles
Journal for Economic Dynamics and Control 37(4), 2013, 756-773 | With Finocchiaro

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This paper proposes a method to structurally estimate a model with a regime shift and evaluates the importance of acknowledging the break in the estimation. We estimate a DSGE model on Swedish data taking into account the regime change in 1993, from exchange rate targeting to inflation targeting. Ignoring the break leads to spurious estimates. Accounting for the break suggests that monetary policy reacted strongly to exchange rate movements in the first regime, and mostly to inflation in the second. The sources of business cycles and their transmission mechanism are significantly affected by the exchange rate regime.
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wp2013-02.pdf – FRBSF Working Paper 2013-02

The Macroeconomic Effects of Large-Scale Asset Purchase Programs
The Economic Journal 122(564), October 2012, F289-F315 | With Chen and Ferrero

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We simulate the Federal Reserve second Large-Scale Asset Purchase program in a DSGE model with bond market segmentation estimated on U.S. data. GDP growth increases by less than a third of a percentage point and inflation barely changes relative to the absence of intervention. The key reasons behind our findings are small estimates for both the elasticity of the risk premium to the quantity of long-term debt and the degree of financial market segmentation. Absent the commitment to keep the nominal interest rate at its lower bound for an extended period, the effects of asset purchase programs would be even smaller.
+ supplement
wp12-22bk.pdf – FRBSF Working Paper 2012-22

The Central-Bank Balance Sheet as an Instrument of Monetary Policy
Journal of Monetary Economics 58(1), January 2011, 47-74 | With Woodford

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While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We first extend a standard New Keynesian model to allow a role for the central bank’s balance sheet in equilibrium determination and then consider the connections between these alternative policy dimensions and traditional interest rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, arguing that, according to our model, while the former is likely to be ineffective at all times, the latter can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.

Credit Spreads and Monetary Policy
Journal of Money, Credit, and Banking 42(S1), September 2010, 3-35 | With Woodford

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We consider the desirability of modifying a standard Taylor rule for a central bank’s interest rate policy to incorporate either an adjustment for changes in interest rate spreads (as proposed by Taylor [2008] and McCulley and Toloui [2008]) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al. [2007]). We then examine how, under those adjustments, policy would respond to various types of economic disturbances, including those originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using a simple DSGE model with credit frictions (Cúrdia and Woodford 2009), comparing the equilibrium responses to various disturbances under the modified Taylor rules with those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve on the standard Taylor rule, but the optimal size of the adjustment is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of variation in credit spreads. A response to credit is less likely to be helpful, and its desirable size (and even sign) is less robust to alternative assumptions about the nature and persistence of economic disturbances.
+ supplement
sr385.html – FRBNY Staff Reports 385

Conventional and Unconventional Monetary Policy
FRB St. Louis Review 92(4), July 2010, 229-264 | With Woodford

+ abstract
The authors extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads and to allow a role for the central bank’s balance sheet in equilibrium determination. They use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central bank policy—variations in the size and composition of the central bank’s balance sheet and payment of interest on reserves—alongside the traditional question of the proper choice of setting an operating target for an overnight policy rate. The authors also give particular attention to the special problems that arise when the policy rate reaches the zero lower bound. They show that it is possible within a single unified framework to identify the criteria for policy to be optimal along each dimension. The suggested policy prescriptions apply equally well when financial markets work efficiently as when they are substantially disrupted and interest rate policy is constrained by the zero lower bound.

Show less FRBSF Publications

How Stimulatory Are Large-Scale Asset Purchases?
Economic Letter 2013-22 | August 12, 2013 | With Ferrero

Show less Other Works