Andrew Foerster
Senior Research Advisor
Macroeconomic Research
Macroeconomics, Monetary economics, Econometrics
CV (pdf, 79.92 kb) | Bio (pdf, 149.86 kb)
Profiles: Google Scholar | RePEc | SSRN | Personal website
Working Papers
Communicating Monetary Policy Rules
2021-12 | with Davig | April 2021
abstract (+)Despite the ubiquity of inflation targeting, central banks communicate their frameworks in a variety of ways. No central bank explicitly expresses their conduct via a policy rule, which contrasts with models of policy. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, inflation tolerance bands, and provide economic projections. When inflation moves outside the band, inflation forecasts provide a time frame over which inflation will return to within the band. We show how this communication replicates and provides the same information as a rule-based policy. In addition, the communication strategy produces a natural benchmark for assessing central bank performance.
Learning about Regime Change
2020-15 | with Matthes | December 2021
abstract (+)Total factor productivity (TFP) and investment specific technology (IST) growth both exhibit regime switching behavior, but the regime at any given time is difficult to infer. We build a rational expectations real business cycle model where the underlying TFP and IST regimes are unobserved. We develop a general perturbation solution algorithm for a wide class of models with unobserved regime-switching. Using our method, we show learning about regime-switching fits the data, affects the responses to regime shifts and intra-regime shocks, increases asymmetries in the responses, generates forecast error bias even with rational agents, and raises the welfare cost of fluctuations.
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
2020-10 | with Benigno, Otrok, and Rebucci | July 2021
abstract (+)We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The estimated crisis episodes are much more persistent and in line with the data than traditional models.
Aggregate Implications of Changing Sectoral Trends
2019-16 | with Hornstein, Sarte, and Watson | January 2022
abstract (+)We find disparate trend variations in TFP and labor growth across major U.S. production sectors and study their implications for the post-war secular decline in GDP growth. We describe how capital accumulation and the network structure of U.S. production interact to amplify the effects of sectoral trend growth rates in TFP and labor on trend GDP growth. We derive expressions that conveniently summarize this long-run amplification effect by way of sectoral multipliers. These multipliers are quantitatively large and for some sectors exceed three times their value added shares. We estimate that sector-specific factors have historically accounted for approximately 3/4 of long-run changes in GDP growth, leaving common or aggregate factors to explain only 1/4 of those changes. Trend GDP growth fell by nearly 3 percentage points over the post-war period with the Construction sector alone contributing roughly 1 percentage point of that decline between 1950 and 1980. Idiosyncratic changes to trend growth in the Durable Goods sector then contributed an almost 2 percentage point decline in trend GDP growth between 2000 and 2018. Remarkably, no sector has contributed any steady significant increase to the trend growth rate of GDP in the past 70 years.
Published Articles (Refereed Journals and Volumes)
Search with Wage Posting under Sticky Prices
Forthcoming in Journal of Money, Credit, and Banking | with Mustre-del-Rio
abstract (+)This paper studies the interaction between nominal rigidities, labor market frictions, and consumption risk in a model where firms face sticky prices and post wage contracts to attract risk averse workers in a frictional labor market. Comparing a calibrated version of the model with two alternative versions–one that separates search and pricing frictions between two types of firms, and one in which a representative household makes consumption and employment decisions at an aggregate level–highlights the importance of integrating labor market and price-setting frictions with individual consumption risk. Separating search and pricing frictions between wholesale and retail sectors increases movements in inflation while muting those in labor markets and other macroeconomic variables. Meanwhile, using a representative household model significantly diminishes the effects of shocks on output and inflation, but increases the effects on vacancies and unemployment.
Optimal Monetary Policy Regime Switches
Review of Economic Dynamics 42, 2021, 333-346 | with Choi
abstract (+)An economy that switches between high and low growth regimes creates incentives for the monetary authority to change the parameters in its simple rule. As lower growth tends to produce lower real interest rates, the monetary authority has an incentive to increase the inflation target and increase the degree of inertia in setting rates in an attempt to keep the nominal rate away from the zero lower bound. An optimal simple rule therefore responds to permanently lower growth by slightly increasing both the inflation target and inertia; focusing solely on the inflation target ignores a key margin of adjustment. With repeated growth rate regime switches, an optimal simple rule that switches at the same time internalizes both the direct effects of growth regime change and the indirect expectation effects generated by switching in policy. The switching rule improves economic outcomes relative to a constant rule. A constant rule may be preferred if the monetary authority attempts a switching rule but implements the wrong rule with high enough frequency.
Uncertainty and Fiscal Cliffs
Journal of Money, Credit, and Banking 51(7), 2019, 1857-1887 | with Davig
abstract (+)Large pending fiscal policy changes, such as in the United States in 2012 or in Japan with consumption taxes, often generate considerable uncertainty. “Fiscal cliff” episodes have several features: an announced possible future change, a skewed set of possible outcomes, the possibility that implementation may not actually occur, and a known resolution date. This paper develops a model capturing these features and studies their impact. Fiscal cliff uncertainty shocks have immediate impact, with a magnitude that depends on the probability of implementation, which generates economic volatility. The possibility of fiscal cliffs lowers economic activity even in periods of relative certainty.
Perturbation Methods for Markov-Switching Dynamic Stochastic General Equilibrium Models
Quantitative Economics 7(2), July 2016, 637-669 | with Rubio-Ramirez, Waggoner, and Zha
abstract (+)Markov‐switching dynamic stochastic general equilibrium (MSDSGE) modeling has become a growing body of literature on economic and policy issues related to structural shifts. This paper develops a general perturbation methodology for constructing high‐order approximations to the solutions of MSDSGE models. Our new method—“the partition perturbation method”—partitions the Markov‐switching parameter space to keep a maximum number of time‐varying parameters from perturbation. For this method to work in practice, we show how to reduce the potentially intractable problem of solving MSDSGE models to the manageable problem of solving a system of quadratic polynomial equations. This approach allows us to first obtain all the solutions and then determine how many of them are stable. We illustrate the tractability of our methodology through two revealing examples.
Monetary Policy Regime Switches and Macroeconomic Dynamics
International Economic Review 57(1), February 2016, 211-230
abstract (+)This article considers the determinacy and distributional consequences of regime switching in monetary policy. Although switching in the inflation target does not affect determinacy, switches in the inflation response can cause indeterminacy. Satisfying the Taylor principle period by period is neither necessary nor sufficient for determinacy when inflation responses switch; indeterminacy can arise if monetary policy responds too aggressively to inflation in the active regime. Inflation target switches primarily impact the level of inflation, whereas inflation response switches primarily impact the volatility. Expecting an inflation target switch has minor effects on volatility, whereas expecting an inflation response switch raises volatility more substantially.
Financial Crises, Unconventional Monetary Policy Exit Strategies, and Agents’ Expectations
Journal of Monetary Economics 76, November 2015, 191-207
abstract (+)A central bank may purchase assets during a financial crisis and then exit from those purchases. Agents have rational expectations about financial crises as rare events, the probability the central bank purchases assets, and the exit strategy. Selling off assets quickly produces a double-dip recession while slowly unwinding generates a smooth recovery. Expectations about the exit strategy influence the initial effectiveness of purchases. Increasing the probability of purchases during crises distorts the pre-crisis economy and depends upon the exit strategy. The welfare benefits of unconventional policy may differ ex-ante versus ex-post, as can the preferred exit strategy.
Bayesian Mixed Frequency VARs
Journal of Financial Econometrics 13(3), Summer 2015, 698-721 | with Eraker, Chiu, Kim, and Seoane
abstract (+)Economic data are collected at various frequencies but econometric estimation typically uses the coarsest frequency. This article develops a Gibbs sampler for estimating vector autoregression (VAR) models with mixed and irregularly sampled data. The Gibbs sampler allows efficient likelihood inference and uses simple conjugate posteriors even in high-dimensional parameter spaces, avoiding a non-Gaussian likelihood surface even when the Kalman filter applies. Two examples studying the relationship between financial data and the real economy illustrate the methodology and demonstrates efficiency gains from the mixed frequency estimator.
Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production
Journal of Political Economy 119(1), February 2011, 1-38 | with Sarte and Watson
abstract (+)Using factor methods, we decompose industrial production (IP) into components arising from aggregate and sector-specific shocks. An approximate factor model finds that nearly all of IP variability is associated with common factors. We then use a multisector growth model to adjust for the effects of input-output linkages in the factor analysis. Thus, a structural factor analysis indicates that the Great Moderation was characterized by a fall in the importance of aggregate shocks while the volatility of sectoral shocks was essentially unchanged. Consequently, the role of idiosyncratic shocks increased considerably after the mid-1980s, explaining half of the quarterly variation in IP.
FRBSF Publications
Employment Effects of COVID-19 across States, Sectors
Economic Letter 2021-32 | November 22, 2021 | with Albert and Sarte
Permanent and Transitory Effects of the 2008–09 Recession
Economic Letter 2020-36 | November 30, 2020 | with Seitelman
Sudden Stops and COVID-19: Lessons from Mexico’s History
Economic Letter 2020-33 | November 9, 2020 | with Benigno, Otrok, and Rebucci
The Highs and Lows of Productivity Growth
Economic Letter 2020-21 | August 3, 2020 | with Matthes and Seitelman
How Have Changing Sectoral Trends Affected GDP Growth?
SF Fed Blog | 2019
Why Is the Federal Reserve’s Balance Sheet Still So Big?
SF Fed Video | Sep 2019 | with Leduc
Why Is the Federal Reserve’s Balance Sheet Still So Big? Our Animated Economic Letter Explains
SF Fed Blog | Sep 2019 | with Leduc
How Have Changing Sectoral Trends Affected GDP Growth?
Economic Letter 2019-18 | July 8, 2019 | with Hornstein, Sarte, and Watson
Why Is the Fed’s Balance Sheet Still So Big?
Economic Letter 2019-16 | June 3, 2019 | with Leduc
