Addressing COVID-19 Outliers in BVARs with Stochastic Volatility
Forecasting with Shadow-Rate VARs
with Andrea Carriero (Queen Mary University of London), Todd Clark (Federal Reserve Bank of Cleveland), Massimiliano Marcellino (Bocconi, IGIER and CEPR)
Measuring Uncertainty and Its Effects in the COVID-19 Era
Indeterminacy and Imperfect Information
with Thomas A. Lubik and Christian Matthes
(Revised August 2020)
Abstract: We study equilibrium determination in an environment where two kinds of agents have different information sets: The fully informed agents know the structure of the model and observe histories of all exogenous and endogenous variables. The less informed agents observe only a strict subset of the full information set. All types of agents form expectations rationally, but agents with limited information need to solve a dynamic signal extraction problem to gather information about the variables they do not observe. In this environment, we identify a new channel that leads to equilibrium indeterminacy: Optimal information processing of the less informed agent introduces stable dynamics into the equation system that lead to self-fulling expectations. For parameter values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium is indeterminate. We illustrate our framework with a monetary policy problem where an imperfectly informed central bank follows an interest rate rule.
Older working papers
On the Reliability of Output Gap Estimates in Real Time
Abstract: Real-time estimates of the Output Gap — defined as the cyclical component of GDP — have previously been shown to be unreliable, since they are subject to large revisions when new data comes in. However, this result has so far only been derived for constant parameter models. This paper uses statistical models where the volatility of shocks to trend and cycle can vary over time. In this case, output gap estimates derived from data vintages going back to the 1970s are much closer to “final” estimates derived from all available sample data. The final estimates not only fall mostly within the credible intervals generated by the real-time data. When generated from a model with stochastic volatility, these credible sets are also tighter, at least over low-volatility periods.
Discreet Commitments and Discretion of Policymakers with Private Information
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.