Measuring the Level and Uncertainty of Trend Inflation (Oct, 2011)
Firmly-anchored inflation expectations are widely viewed as playing a central role in the successful conduct of monetary policy. This paper presents estimates of trend inflation, based on information contained in survey expectations, the term structure of interest rates, and realized inflation rates. In order to assess whether inflation expectations are anchored, a time-varying volatility of trend shocks is estimated as well.
Considering the recent crisis, full-sample estimates of trend inflation fell quite a bit, but not too dramatically. In contrast, real-time estimates recorded sizeable increases of trend uncertainty during the crisis of 2007/2009, which have abated since then.
Managing Beliefs about Monetary Policy under Discretion (Nov, 2011)
In models of monetary policy, discretionary policymaking lacks in its ability to manage public beliefs. However, when a policymaker possesses private information, belief management becomes an integral part of optimal discretion policies.
My paper derives the optimal time-consistent policy in a general linear-quadratic setting. The policy is first illustrated in a simple case, where losses are lower when the policymaker's output targets are imperfectly observed. In a richer model, it is shown how disinflations are pursued more vigorously, the less transparent the inflation target, even when inflation is partly backward-looking. Importantly, intransparency about the inflation target causes larger policy los
ses.
Discreet Commitments and Discretion of Policymakers with Private Information (2010)
This papers presents general methods to compute optimal commitment and discretion policies, when a policymaker is better informed about the realization of some shocks than the public. In this situation, public beliefs about the hidden information emerge as additional state variables, managed by the policymaker.
Under commitment, policy is additive in two components: The optimal policy, as if the government shared the public's information set and the systematic manipulation of that information set. Even under discretion, belief management imparts history dependence.
Illustrated in a New Keynesian economy with time-varying output targets of the policymaker, belief management improves outcomes compared to symmetric information. At the margin, the policymaker tries to be intransparent about policy objectives by engineering disturbances which lower public beliefs about the persistence of output targets.
Are Spectral Estimators Useful for Long-Run Restrictions in SVARs? (2011)
No, not really. In response to concerns about the reliability of SVARs, it has previously been proposed to combine OLS estimates of a VAR with non-parametric estimates of the spectral density. But as shown here, spectral estimators are no panacea for implementing long-run restrictions. They suffer from small sample and misspecification biases just as VARs do.
In addition, when combining VAR coefficients with non-parametric estimates of the spectral density, it is important to consistently account for information embedded in the non-parametric estimates about serial correlation in VAR residuals. This paper uses a spectral factorization to ensure a correct representation of the data's variance. But this cannot overcome the fundamental problem of having to estimate the long-run dynamics of macroeconomic data in moderately sized samples.
