Working papers are academic research by SF Fed economists and affiliates intended for publication in scholarly journals. This section contains working papers on monetary economics and macro-finance topics that have been authored or co-authored by SF Fed Economists.
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Prices and Monetary Policy: The Role of Financial Constraints
Michael Bauer, Alexander Czarnota, Mathias Klein
Firm heterogeneity in financial constraints is a quantitatively important driver of how monetary policy transmits to inflation. Using detailed microdata on Swedish public and private firms, and high-frequency monetary policy surprises around Riksbank announcements, we document that smaller, financially constrained firms adjust prices significantly less than larger firms in response to changes in monetary policy. This heterogeneous price response materially dampens the aggregate PPI inflation response to monetary policy. Models of customer markets and financial frictions can explain our findings: because the external finance premium rises after a monetary contraction, constrained firms cut prices less to preserve cash flows, sacrificing future […]
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Trends in Labor Force Participation and Unemployment, 1976-2024
Andreas Hornstein, Marianna Kudlyak
Using CPS microdata, 1976-2024, we estimate trend and cyclical components of unemployment and labor force participation for 44 age-gender-education groups. We fit a parsimonious state-space model in which each series is the sum of latent cohort and time-varying age effects and a latent cyclical factor shared across unemployment and participation, without imposing structural covariates. Aggregating group trends with observed population shares, we find that population aging and educational upgrading explain most long-run movements in aggregate trends, while cohort effects drive large gender differences in participation. Combining our estimates with demographic projections and an estimated cohort model of education shares, we forecast […]
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Measuring Inflation Shock Momentum
Adam Shapiro, Kevin J. Lansing
We develop a non-parametric filter that identifies sustained directional runs in shocks to monthly inflation—a concept we define as “inflation shock momentum.” By assessing the shocks to over 100 disaggregated Personal Consumption Expenditures (PCE) inflation categories, we isolate the share of categories experiencing positive or negative inflation shock momentum in a given month. We define the “Inflation Shock Momentum” (ISM) index as the net positive momentum share of expenditure-weighted categories (positive minus negative) in a given month. We show that the ISM index helps to forecast aggregate PCE inflation at horizons of 1 to 3 years, even after controlling for a […]
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Stabilization vs. Growth
Miguel Faria-e-Castro, Pascal Paul, Juan M. Sanchez
Should firms in financial distress be saved to stabilize an economy, even if less productive ones are kept alive, possibly reducing economic growth? To assess this fundamental stabilization-vs. growth trade-off, we develop a new dynamic general equilibrium model with business cycles, endogenous growth, and innovation externalities. We discipline key parameters using microeconomic data and an instrumental-variable approach that links firm productivity growth to R&D expenditure. Based on the calibrated model, we find that economies that save distressed firms with credit guarantees, debt restructuring, or loan evergreening experience lower volatility but also slower growth. Even though welfare is higher in an economy […]
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From Volcker to the Pandemic Era: History Dependent Anchoring of Short-Run Expected Inflation
Peter Lihn Jorgensen, Kevin Lansing
We develop an endogenous measure of anchoring for short-run expected inflation in a New Keynesian model with full-information rational expectations. Specifically, we allow the fraction of non-reoptimizing firms that index prices to the inflation target, rather than lagged inflation, to depend on observed inflation persistence. The model with endogenous indexation generates a scatter plot of persistence and volatility measures for inflation that approximates the convex pattern observed in quarterly U.S. data. With endogenous indexation, the equilibrium anchoring measure exhibits history dependence. To illustrate this idea, we perform a series of disinflation simulations where the model inflation target declines to 2% at […]
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Real Effects of Nominal Interest Rates
Joshua K. Hausman, John V. Leahy, John Mondragon, Johannes Wieland
Nominal interest rates have real effects. Residential mortgages and other real world debt contracts require a sequence of constant nominal payments. Combined with payment-to-income constraints, these nominal payments force borrowers to take on less debt when nominal interest rates rise, regardless of the behavior of the real interest rate. Survey data shows that conditional on the real rate, higher nominal mortgage interest rates reduce home buying sentiment. And increases in nominal mortgage rates reduce mortgage origination more in cities where payment to-income constraints are more likely to bind. We explore the macroeconomic implications of payment-to-income constraints in a new Keynesian model […]
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Financial Conditions and Capital Investment Choices
Oscar Jorda, Fernanda Nechio, Toan Phan, Felipe Schwartzman
We show, both theoretically and empirically, that tight financial conditions shift investment toward cheaper but less energy-efficient capital. In a small open-economy model with vintage capital, higher financing costs reduce the present value of future energy savings, tilting firms’ choices along a cost efficiency frontier. Using 150 years of macroeconomic and energy data from 17 advanced economies, we find that tighter financial conditions reduce output, capital, and total energy consumption, but raise the amount of energy per unit of capital (energy intensity), a composition effect that persists for 6 to 8 years. Tight financial conditions lower energy use in the short […]
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ChatMacro: Evaluating Inflation Forecasts of Generative AI*
M. Jahangir Alam, Shane Boyle, Huiyu Li, Tatevik Sekhposyan
Recent research suggests that generic large language models (LLMs) can match the accuracy of traditional methods when forecasting macroeconomic variables in pseudo out-of-sample settings generated via prompts. This paper assesses the out-of-sample forecasting accuracy of LLMs by eliciting real-time forecasts of U.S. inflation from ChatGPT. We find that out-of-sample predictions are largely inaccurate and stale, even though forecasts generated in pseudo out-of-sample environments are comparable to existing benchmarks. Our results underscore the importance of out-of-sample benchmarking for LLM predictions. Suggested citation: Alam, M. Jahangir, Shane Boyle, Huiyu Li, and Tatevik Sekhposyan. 2026. “ChatMacro: Evaluating Inflation Forecasts of Generative AI*.” Federal Reserve […]
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Financial Market Effects of FOMC Communication: Evidence from a New Event-Study Database
Miguel Acosta, Andrea Ajello, Michael Bauer, Francesca Loria, Silvia Miranda-Agrippino
This paper introduces the U.S. Monetary Policy Event-Study Database (USMPD), a novel, public, and regularly updated dataset of financial market data around Federal Open Market Committee (FOMC) policy announcements, press conferences, and minutes releases. Using the rich high-frequency data in the USMPD, we document several new empirical findings. Large monetary policy surprises have made a comeback in recent years, and post-meeting press conferences have become the most important source of policy news. Monetary policy surprises have pronounced negative effects on breakeven inflation based on Treasury yields. Risk assets, including dividend derivatives, also respond strongly and negatively to monetary policy surprises, consistent […]
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Not All Inflation Is the Same: State-Dependent Transmission of Monetary Policy
Rami Najjar, Adam Shapiro
We show that the underlying source of inflation impacts financial market perceptions of the persistence of monetary policy surprises. Financial markets expect policy surprises to be more persistent when inflation is driven by demand factors. During supply-driven episodes, markets perceive these surprises as less persistent. This divergence in perception arises from markets updating their beliefs about the Fed’s state dependent, or “targeted,” reaction function. Markets infer more information about the Fed’s long-term policy path when surprises occur during periods of large demand imbalances, while they discount this information during supply imbalances. These dynamics lead longer-run interest rates to be more sensitive […]