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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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 […]
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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 […]
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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 […]
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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, […]
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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 […]
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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 tightening. Investors expect policy tightening to be more persistent inflation is driven by demand factors. During supply-driven episodes, however, investors perceive tightening as less persistent and less effective at producing a disinflation. These results point to a […]
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Monetary Policy and The Medium-Run Natural Rate
Vasco Curdia
The natural rate of interest is an elusive concept in theory and practice. However, it is essential for central banks’ calibration of the policy rate. Model consistent measures are often too extreme to be used in practice. On the other hand, empirical measures lack the full backing of theory to make them proper benchmarks. This […]
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Accounting for Uncertainty and Risks in Monetary Policy
Michael Bauer, Travis Berge, Giuseppe Fiori, Francesca Loria, Molin Zhong
This paper discusses the measurement, assessment, and communication of risks and uncertainty that are relevant for monetary policy. It provides a taxonomy of policy-relevant uncertainty related to the state and the structure of the economy, and the formation of expectations. A wide range of tools is available to assess and quantify uncertainty and the balance […]
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Evaluating Macroeconomic Outcomes Under Asymmetries: Expectations Matter
Brent Bundick, Isabel Cairo, Nicolas Petrosky-Nadeau
Asymmetries play an important role in many macroeconomic models. We show that assumptions on household and firm expectations play a key role in determining the effects of these asymmetries on macroeconomic outcomes. If households and firms have perfect foresight and hence do not account for the possibility of future shocks, then the implied longer-run averages and distributions for unemployment and inflation can differ significantly from their rational expectations counterparts. We first derive this result analytically under either an asymmetric monetary policy rule or a nonlinear Phillips curve before numerically examining some of the key nonlinearities featured in the recent literature.
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Inflation Since the Pandemic: Lessons and Challenges
Ina Hajdini, Adam Shapiro, A. Lee Smith, Daniel Villar
This paper reviews the drivers of the post-pandemic U.S. inflation surge and subsequent decline, including the behavior and role of inflation expectations. The sharp rise in inflation reflected severe imbalances between supply and demand stemming from the shocks of the pandemic and the policy response. Measures of short-term inflation expectations increased alongside realized inflation, especially those of households and firms, which may have contributed to inflation’s persistence through price- and wage-setting behavior. However, measures of longer-term inflation expectations remained generally well anchored, which likely prevented a larger or more lasting increase in inflation. The stability of longer-term inflation expectations, together with easing supply and demand imbalances, allowed inflation to fall from its peak in mid-2022 without a large increase in unemployment. We conclude by reviewing some lessons learned from this episode as well as potential risks to inflation going forward.