Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis
Jeffrey R. Campbell, University of Notre Dame
Jonas Fisher, Federal Reserve Bank of Chicago
Alejandro Justiniano, Federal Reserve Bank of Chicago
Leonardo Melosi, Federal Reserve Bank of Chicago

This paper studies the effects of FOMC forward guidance. Campbell, Fisher, Justiniano, and Melosi begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed almost entirely to Delphic forward guidance. However a large fraction of futures rates’ variability on announcement days remains unexplained leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. The researchers then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end the researchers use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009:1–2014q4 in which they assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function inherited from before the crisis as closely as possible while respecting the effective lower bound. The authors find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis — forward guidance was counterproductive. However starting toward the end of 2011, after the Fed’s introduction of “calendar-based” communications, Odyssean guidance appears to have boosted real activity and moved inflation closer to target. The authors show that their results do not reflect Del Negro, Giannoni, and Patterson (2015)’s forward guidance puzzle.

The Analytics of the Greek Crisis
Pierre-Olivier Gourinchas, University of California, Berkeley and NBER
Thomas Philippon, New York University and NBER
Dimitri Vayanos, London School of Economics and NBER

This paper presents an interim and analytical report on the Greek Crisis of 2010. The Greek crisis presents a number of important features that sets it apart from the typical sudden stop, sovereign default, or lending boom/bust episodes of the last quarter century. Gourinchas, Philippon, and Vayanos provide an analytical account of the Greek crisis using a rich model designed to capture the main financial and macro linkages of a small open economy. Using the model to parse through the wreckage, they uncover the following main findings: (a) Greece experienced a more prolonged and severe decline in output per capita than almost any crisis on record since 1980; (b) the crisis was significantly backloaded, thanks to important financial assistance mechanisms; (c) a sizable share of the crisis was the consequence of the sudden stop that started in late 2009; (d) the severity of the crisis was compounded by elevated initial levels of exposure (external debt, public debt, domestic credit), vastly in excess of levels observed in typical emerging economies. In summary: Greece experienced a typical Emerging Market Sudden Stop crisis, with the initial exposure levels of an Advanced Economy.


In addition to the conference paper, the research was distributed as NBER Working Paper w22370, which may be a more recent version.

Are State and Time Dependent Models Really Different?
Fernando E. Alvarez, University of Chicago and NBER
Francesco Lippi, LUISS University
Juan Passadore, Einaudi Institute for Economics and Finance

Yes, but only for large monetary shocks. In particular, Alvarez, Lippi, and Passadore show that for a large class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is non-linear in state-dependent models, while it is independent of the shock size in time-dependent models. The researchers use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. They find evidence of a non-linear effect of exchange rate changes on prices in the sample of flexible-exchange rate countries with low inflation. In particular, the authors find that large exchange rate changes have larger short term pass through, as implied by state dependent models.


In addition to the conference paper, the research was distributed as NBER Working Paper w22361, which may be a more recent version.

Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?
Christopher Erceg, International Monetary Fund
Olivier J. Blanchard, Peterson Institute for International Economics and NBER
Jesper Lindé, Sveriges Riksbank

Erceg, Blanchard, and Lindé show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under their preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, nearly half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.

Is the Macroeconomy Local Unstable, and Why Should we Care?
Paul Beaudry, Bank of Canada
Dana S. Galizia, Carleton University
Franck Portier, University College London

In most modern macroeconomic models, the steady state (or balanced growth path) of the system is a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this paper, Beaudry, Galizia, and Portier examine whether the time series behavior of macroeconomic aggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomic dynamics, or if it instead favors an alternative interpretation in which the macroeconomy may be better characterized as being locally unstable, with nonlinear deterministic forces capable of producing endogenous cyclical behavior. To do this, the researchers extend a standard AR representation of the data to allow for smooth nonlinearities. Their main finding is that, even using a procedure that may have low power to detect local instability, the data provide intriguing support for the view that the macroeconomy may be locally unstable and involve limit-cycle forces. An interesting finding is that the degree of nonlinearity the authors detect in the data is small, but nevertheless enough to alter the description of macroeconomic behavior. They complete the paper with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy.

Macrofinancial History and the New Business Cycle Facts
Òscar Jordà, Federal Reserve Bank of San Francisco
Moritz Schularick, University of Bonn
Alan M. Taylor, University of California, Davis and NBER

In the era of modern finance, a century-long near-stable ratio of credit to GDP gave way to increasing financialization and surging leverage in advanced economies in the last forty years. This “financial hockey stick” coincides with shifts in foundational macroeconomic relationships beyond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments. Jordà, Schularick, and Taylor document an extensive set of such moments based on a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility but lower growth, more tail risk, and tighter real-real and real-financial correlations. International real and financial cycles also cohere more strongly. The new stylized facts the researchers document should prove fertile ground for the development of a newer generation of macroeconomic models with a prominent role for financial factors.


In addition to the conference paper, the research was distributed as NBER Working Paper w22743, which may be a more recent version.


Below is a list of conference attendees.
Yannis M. Ioannides, Tufts University
Bryan Keogh, "The Conversation"
Takushi Kurozumi, Bank of Japan
Richard M. Miller, Bloomberg
Tao Peng, Southwestern University of Finance and Economics
Steven Strongin, Goldman Sachs
Mark Thoma, University of Oregon

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