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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A Dual Mandate Can Support Price Stability
Brent Bundick, Nicolas Petrosky-Nadeau
Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover,…
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Reaching for Duration
Thomas Mertens, Pascal Paul, Andres Schneider
Using historical data on U.S. commercial bank balance sheets, we show that banks’ maturity mismatch has more than tripled since the mid-1980s, moving in close lockstep with declining interest rates and term premia. We rationalize these trends in a model of bank portfolio choice in which banks must cover operating costs out of current earnings.…
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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.…
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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…
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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…
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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…
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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,…