Westelius (2009, JEDC) studies the consequences of intransparent output targets in a simple New Keynesian Model. The model is identical to the simple model used to illustrate the optimal policy in my "Managing Beliefs about Monetary Policy under Discretion", but the policies differ substantially.

Westelius has policy follow the targeting rule, which would be optimal when the policy targets were fully transparent. In contrast, my paper derives the optimal policy when the targets are intransparent.

The two policies are compared in this little note (pdf).

"Measuring the Level and Uncertainty of Trend Inflation" extracts a measure of trend inflation from a panel of indicator variables for the U.S. since the 1960s. A central element of my approach is to allow for time-varying volatility in trend shocks, discerning periods of unanchored inflation expectations (like the late 1970s) and well-anchored inflation expectations (like the Great Moderation period).

The specific contribution of my paper is to condition the estimates on a broad set of variables, including forward-looking measures like survey expectations and long-term bond yields. Real-time results suggest considerable stress not only during the late 1970s but also during the recent crisis.

The dataset is monthly, and the model can flexibly handle variables sampled at different frequencies and with missing observations.

Below are estimates derived from realized inflation rates and survey data:


The top panel shows the trend level in annualized percentage points, the bottom panel displays the estimated standard deviation of trend shocks.

Here is a comparison between the trend level and some select data series:


Here are estimates for the recent crisis, derived from different information sets:


And here are real-time estimates (derived from a smaller information set):



See my working papers for more.

The paper (pdf) derives the optimal, time-consistent policy when the policymaker has private information, e.g. about future fundamentals or about his policy targets, in a generic linear-quadratic framework.

New in this revsion is an analysis of optimal disinflation policies after a drop in the policymaker's inflation target and in the presence of multiple frictions (sticky prices and wages) as well as multiple sources of uncertainty.

Many economists have argued about the optimal disninflation strategy when credibility is at stake, and when inflation is highly inertial. My framework allows to study policy design in an explicitly optimizing framework.

When inflation is highly inertial -- say, because of a strong backward-looking component in the Phillips Curve -- the optimal policy does not go "cold turkey" in a rapid disinflation. However, when the inflation target cannot be directly observed by the public, optimal monetary policy is tighter and raises the real rate by more, than when the new target were well known by the public.

Also, while intransparency about output targets might be welfare enhancing, losses are larger in my model when the inflation target lacks transparency.


See my working papers for more.

Here are the slides for my talk (pdf) at the Dynare conference about my "Discreet Commitments" paper (pdf, revision to be posted soon). Below are a few summary slides.

My first thesis chapter revisited the output-interest rate puzzle of King and Watson (1996, REStat), who found it hard to match the comovements between output and interest rates (real and nominal) with a wide array of DSGE models.

My thesis already found that conditional on shocks to technology and monetary policy, comovements were in line with standard models, where different shocks induce different comomvents.

In a revised version, I have added now more shocks and also did some sub-sample analysis, where I found that the puzzling anti-cyclical behavior of the real rate, vanishes over the Great Moderation (see picture below, click to enlarge). Interestingly, this is mostly due to a change in the composition of shocks hitting the economy, and less to a change in the conditional comovements induced by each shock.

In terms of additional shocks, I found news shocks quite important to explain the comovements unexplained by technology and monetary policy. The anticylical behavior of the real rate, seems to stem from random walk shocks to inflation, occuring during the Great Inflation. In ongoing work, I intend to investigate this further by extending the stochastic volatility models of inflations used by Stock and Watson (2007, JMCB) and Cogley, Primiceri and Sargent (2010, AEJ Macro).

The paper has been published at the Journal of Economic Dynamics and Control and the manuscript can be found under my publications.