the fomc versus the staff revisited when do policymakers add value abstract the board of governors staff and the federal open market committee both publish macroeconomic forecasts romer and romer 2008 show that policymakers attempts to add information to the staff forecasts are counterproductive in more recent years however policymakers have improved upon staff forecasts we show that policymakers value added in forecasting is greater when economic conditions are unfavorable or uncertain

methods for robust control robust control allows policymakers to formulate policies that guard against model misspecification the principal tools used to solve robust control problems are state space methods see hansen l p sargent t j 2008 robustness princeton university press giordani p soderlind p 2004 solution of macromodels with hansen sargent robust policies some extensions journal of economic dynamics and control 28 12 2367 2397 in this paper we show that the structural form methods developed by dennis 2007 optimal policy rules in rational expectations models new solution algorithms macroeconomic dynamics 11 1 31 55 to solve control problems with rational expectations can also be applied to robust control problems with the advantage that they bypass the task often onerous of having to express the reference model in state space form in addition we show how to implement two different timing assumptions with distinct implications for the robust policy and the economy we apply our methods to a new keynesian dynamic stochastic general equilibrium model and find that robustness has important effects on policy and the economy

do central bank forecasts influence private agents forecasting performance versus signals focusing on a set of central banks that publish their internal macroeconomic forecasts in real time enables one to shed light on the expectations channel of monetary policy the main contribution of this paper is to assess whether central bank forecasts influence private forecasts the response is positive for inflation forecasts in sweden the uk and japan to disentangle the sources of influence of central banks two concepts are proposed endogenous influence which is due to more accurate central bank forecasts and exogenous influence which is due to central bank signals on either future policy decisions or private information original empirical evidence on the central bank forecasting performance relative to private agents is provided and estimates show that in sweden more accurate inflation forecasts generate specific central bank influence that is different from the influence from signals the publication of forecasts may therefore refer to two central banking strategies that aim to shape private expectations forecasting or policymaking

borrowing constraints human capital accumulation and growth abstract borrowing constraints increase aggregate savings and therefore may increase growth this paper argues however that by reducing human capital accumulation borrowing constraints also have negative effects on growth these effects are discussed in an overlapping generations model with endogenous growth empirical evidence for oecd and developing countries lend support to the main predictions of the model

public versus private investment in human capital endogenous growth and income inequality in this paper we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth we use simple functional forms for preferences technologies and income distribution to highlight the distinction between economies with public education and those with private education we find that income inequality declines more quickly under public education on the other hand private education yields greater per capita incomes unless the initial income inequality is sufficiently high we also find that societies will choose public education if a majority of agents have incomes below average

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

reconciling narrative monetary policy disturbances with structural var model shocks structural var studies disagree with narrative accounts about the history of monetary policy disturbances we investigate whether employing the narrative monetary shocks as a proxy variable in a var model aligns both shock series we find that it does not

a defense of the fomc we defend the forecasting performance of the fomc from the recent criticism of christina and david romer our argument is that the fomc forecasts a worst case scenario that it uses to design decisions that will work well enough are robust despite possible misspecification of its model because these fomc forecasts are not predictions of what the fomc expects to occur under its model it is inappropriate to compare their performance in a horse race against other forecasts our interpretation of the fomc as a robust policymaker can explain all thefindings of the romers and rationalises differences between fomc forecasts and forecasts published in the greenbook by the staff of the federal reserve system

an example of robustly optimal monetary policy with near rational expectations this paper considers optimal monetary stabilization policy in a forward looking model when the central bank recognizes that private sector expectations need not be precisely model consistent and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model consistency it is found that commitment continues to be important for optimal policy that the optimal long run inflation target is unaffected by the degree of potential distortion of beliefs and that optimal policy is even more history dependent than if rational expectations are assumed jel e52

the monetary policy response to uncertain inflation persistence abstract we consider the implications of uncertainty regarding the persistence of inflation for the conduct of monetary policy in the context of a stylized new keynesian model under the governance of a taylor type rule both bayesian and robust or ambiguity averse approaches are employed the result one might have expected based on the seminal paper of brainard 1967 which implies attenuation in policy responses does not hold for the case of uncertain inflation persistence in either the bayesian or robust cases

local robustness analysis theory and application this paper develops a general framework for conducting local robustness analysis by local robustness we refer to the calculation of control solutions that are optimal against the least favorable model among models close to an initial baseline we provide nash and stackelberg equilibrium characterizations of the choice of control we apply this abstract formulation to a class of discrete time control problems this analysis is conducted using frequency domain methods and is shown to involve certain fundamental limits to the efficacy of controls in such environments finally we discuss some implications of our results for monetary policy

bias in federal reserve inflation forecasts is the federal reserve irrational or just cautious abstract inflation forecasts of the federal reserve seem to have systematically under predicted inflation from the fourth quarter of 1968 until volcker s appointment as chairman and to systematically over predict it afterwards until the second quarter of 1998 furthermore under quadratic loss commercial forecasts seem to have information not contained in those forecasts to investigate the cause of this apparent irrationality this paper recovers the loss function implied by federal reserve s inflation forecasts the results suggest that the cost of having inflation above an implicit time varying target was larger than the cost of having inflation below it for the period since volcker and that the opposite was true for the pre volcker era once these asymmetries are taken into account the federal reserve s inflation forecasts are found to be rational

long run equilibria with borrowing constraints and altruism this paper adapts a nonstochastic overlapping generations model to include liquidity constraints and intergenerational altruism existing work indicates the importance of both but often considers them separately this paper studies their interactions first it shows that they tend to conflict the model only admits stationary equilibria with dynastic wealth accumulation but no binding liquidity constraints or wity binding constraints but no dynastic accumulation second it examines the latter type of equilibrium closely if liquidity constraints bind quantitative examples imply that consequent utility losses may be small and that economywide wealth accumulation tends to be unrealistically low

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

intergenerational transfers and capital market imperfections evidence from a cross section of italian households abstract we investigate whether a system of family finance exists and to what extent it is able to offset capital market imperfections a simple model of intergenerational transfers implies that the probability of a liquidity constrained consumer receiving a transfer is negatively correlated with his current endowment and positively correlated with his future resources we test this proposition using a recent survey of italian households in which both transfer recipients and liquidity constrained households are readily observable the results indicate that private transfers help to ease borrowing constraints however a substantial number of liquidity constrained households remain after transfers have been made

on the robustness of simple and optimal monetary policy rules abstract this is a discussion of the paper simple versus optimal rules as guides to policy by brock durlauf nason and rondina bdnr presented in november 2006 at carnegie mellon university under the auspices of the carnegie rochester conference series on public policy i review the authors arguments present a few suggestions for extension and outline where i think at least one strand of the literature should be heading

robust monetary policy in a small open economy abstract we study how a central bank in a small open economy should conduct monetary policy if it fears that its model is misspecified using a new keynesian model of a small open economy we solve analytically for the optimal robust policy rule and the equilibrium dynamics and we separately analyze the consequences of central bank robustness against misspecification concerning the determination of inflation output and the exchange rate we show that an increase in the preference for robustness makes the central bank respond more aggressively or more cautiously to shocks depending on the type of shock and the source of misspecification

life cycle individual thrift and the wealth of nations this paper provides a review of the theory of the determinants of individual and national thrift that has come to be known as the life cycle hypothesis lch of saving applications to some current policy issues are also discussed part i deals with the state of the art on the eve of the formulation of the lch some 30 years ago part ii sets forth the theoretical foundations of the model in its original formulation and later amendment calling attention to various implications distinctive to it and sometimes counter intuitive it also includes a review of a number of crucial empirical tests both at the individual and the aggregate level part iii reviews some applications of lch to current policy issues though only in sketchy fashion as space constraints prevent fuller discussion this abstract was borrowed from another version of this item

financial development and economic growth abstract this paper examines the empirical relationship between long run growth and financial development proxied by the ratio between bank credit to the private sector and gdp we find that this proxy is positively correlated with growth in a large cross country sample but its impact changes across countries and is negative in a panel data for latin america we argue that the latter findings is the result of financial liberalization in a poor regulatory environment our findings also show that the main channel of transmission from financial development to growth is the efficiency rather than the volume of investment

government debt redistributive fiscal policies and the interaction between borrowing constraints and intergenerational altrusim abstract we show how borrowing constraints intergenerational altruism and their interaction shape the aggregate savings response to government debt and fiscal policies that redistribute resources between living generations we also characterize the conditions under which borrowing constraints bind and the altruistic transfer motive operates in terms of the strength of the altruism motive the shape of the lifetime productivity profile the willingness to substitute consumption intertemporally and other factors finally we characterize the dynamic response of aggregate savings to nonneutral government debt policies in economies with binding borrowing constraints

dynamic decision making a cross cultural comparison of u s and peruvian export managers export managers from the u s and peru completed a survey designed to measure cooperative decisions during a sequence of three simulated interactions with business partners during the initial stage of the relationship the decisions of peruvian export managers reflect less trust than do those of their u s counterparts during the second stage peruvian exporters respond differently to weak cheating results generally are consistent with cultural differences in attitudes toward in group v out group members however the influence of cultural differences gradually erodes in favor of personal characteristics and relationship specific history suggesting that cultural differences between business partners decline in importance as they get to know each other

model uncertainty and intertemporal tax smoothing in this paper we examine how model uncertainty due to the preference for robustness rb aects optimal taxation and the evolution of debt in the barro tax smoothing model 1979 we rst study how the government spending shocks are absorbed in the short run by varying taxes or through debt under rb furthermore we show that introducing rb improves the model s predictions by generating i the observed relative volatility of the changes in tax rates to government spending ii the observed comovement between government decits and spending and iii more consistent behavior of government budget decits in the us economy finally we show that rb can also improve the model s predictions in the presence of multiple shocks

robust optimal policy in a forward looking model with parameter and shock uncertainty this paper characterizes a robust optimal policy rule in a simple forward looking model when the policymaker faces uncertainty about model parameters and shock processes we show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations however uncertainty may amplify the degree of super inertia required by optimal monetary policy we finally discuss the sensitivity of the results to alternative assumptions copyright 2007 john wiley sons ltd

asymmetry complementarities and state dependence in federal reserve forecasts forecasts are a central component of policymaking the federal reserve s forecasts are published in a document called the greenbook previous studies of the greenbook s inflation forecasts have found them to be rationalizable but asymmetric if considering particular subperiods for example before and after the volcker appointment in these papers forecasts are analyzed in isolation assuming policymakers value them independently we analyze the greenbook forecasts in a framework in which the forecast errors for different variables are allowed to interact we find that allowing the losses to interact makes the unemployment forecasts virtually symmetric the output forecasts symmetric prior to the volcker appointment and the inflation forecasts symmetric after the onset of the great moderation

the asian financial crisis and international reserve accumulation a robust control approach abstract standard macroeconomic models have difficulties accounting for the surge in international reserves of asian countries in the aftermath of the asian financial crisis of 1997 we propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon using korean data we estimate a simple permanent income model augmented with model uncertainty find a structural break at the point of the asian financial crisis and identify a rise in concern for model misspecification which is distinct from an increase in income volatility the post crisis concern for model misspecification implies a reasonable detection error probability we also show that learning serves as an additional powerful amplification mechanism in our framework

evaluating the efficiency of the fomc s new economic projections since 2007 fomc policymakers have been publishing detailed numerical projections of macroeconomic series over the next three years by testing whether the revisions to these projections are unpredictable i find that fomc s efficiency is generally accepted for inflation but often rejected for real economic variables notably for the unemployment rate the rejection is due to the strong autocorrelation of revisions which may reflect information rigidity of fomc s unemployment projections the joint efficiency of the entire projection is accepted in most cases

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

a robust hansen sargent prediction formula this paper derives a formula for the optimal forecast of a discounted sum of future values of a random variable where optimal is defined in terms of the minimized h norm of the forecast error this problem reflects a preference for robustness in the presence of unstructured model uncertainty the paper shows that revisions of a robust forecast are more sensitive to new information and discusses the relevance of this result to previous findings of excess sensitivity of consumption and asset prices to new information 2001 elsevier science b v all rights reserved

the rationality of usda forecasts under multivariate asymmetric loss a large number of previous studies suggest that many usda forecasts are biased and or inefficient these findings however may be the result of the assumed loss function of usda forecasters we test the rationality of the usda net cash income forecasts and the wasde production and price forecasts between 1988 and 2018 using a flexible multivariate loss function that allows for asymmetric loss and non separable forecast errors our results provide robust evidence that usda forecasters are rational expected loss minimizers yet demonstrate a tendency to place a greater weight on under or overprediction as a result this study provides an alternate interpretation of previous findings of forecast irrationality

frequency specific effects of stabilization policies in this paper we describe a set of trade offs that policymakers face with respect to fluctua tions at different frequencies a complete treat ment is given in brock durlauf and rondina 2008 the presence of frequency specific effects of policy choices has generally not been a focus of macroeconomic policy analysis important exceptions include alexei onatski and noah m williams 2003 our analysis dif fers from previous studies in that our objective is to understand to what extent a policymaker is forced when choosing a feedback rule to sta bilize the economy to exacerbate volatility at some frequencies in order to reduce them at oth ers or whether it is possible to reduce volatil ity at all frequencies these trade offs known as design limits in the control theory literature are important in understanding what stabiliza tion policies do and also possess implications for policy design in the presence of policymaker ignorance

the fomc versus the staff where can monetary policymakers add value a key issue in monetary policymaking is the appropriate division of labor between the profes sional staff of the central bank and the appointed policymakers lars e o svensson 1999 argues that the appropriate role of a policymaking group such as the federal open market com mittee fomc in the united states is to make judgments about social welfare taking as given the likely outcomes of different policies as esti mated by the staff in this division the staff is relied upon to assess current and prospective economic conditions and to forecast the effects of different policies policymakers only role is to decide which of the various options should be chosen

estimation and testing of forecast rationality under flexible loss in situations where a sequence of forecasts is observed a common strategy is to examine rationality conditional on a given loss function we examine this from a different perspective supposing that we have a family of loss functions indexed by unknown shape parameters then given the forecasts can we back out the loss function parameters consistent with the forecasts being rational even when we do not observe the underlying forecasting model we establish identification of the parameters of a general class of loss functions that nest popular loss functions as special cases and provide estimation methods and asymptotic distributional results for these parameters this allows us to construct new tests of forecast rationality that allow for asymmetric loss the methods are applied in an empirical analysis of imf and oecd forecasts of budget deficits for the g7 countries we find that allowing for asymmetric loss can significantly change the outcome of empirical tests of forecast rationality