Perspectives on U.S. Monetary Policy Tools and Instruments. The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve better tools with which to achieve its strategic objective of influencing inflation and output. Click here for a video of my presentation of the paper.
The Efficacy of Large-Scale Asset Purchases When the Short-term Interest Rate is at its Effective Lower Bound, Brookings Papers on Economic Activity, Fall 2018. The Federal Reserve on net purchased almost $4 trillion in additional securities between March 2009 and December 2014. Although initial announcements of these policies were associated with dramatic market reactions, these responses were soon reversed. The overall market reaction to news surprises from the Federal Reserve over this period was increases, not decreases, in interest rates. It is hard to disentangle the effects of the purchases themselves from new information about economic fundamentals. My conclusion is that it is difficult to estimate accurately what LSAP accomplished, but the magnitude of the effect is likely smaller than commonly believed.
A Skeptical View of the Impact of the Fed's Balance Sheet, prepared for the 2018 U.S. Monetary Policy Forum, coauthored with David Greenlaw, Ethan Harris, and Kenneth West. We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs) and draw lessons for monetary policy going forward. Most previous studies have found that quantitative easing (QE) lowered long term yields, with a rough consensus that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual population of possible events and exploit interpretations provided by the business press. We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist. In addition, although the Fed began the transition to a smaller balance sheet sooner than the market had expected, the announcements and implementation of the balance-sheet reduction do not seem to have affected rates much. These observations lead us to conclude that the effects of LSAP are likely more modest than generally claimed. Going forward, we expect the Federal Reserve’s balance sheet to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s balance sheet. Our conclusion is that the most important and reliable instrument of monetary policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward.
Robust Bond Risk Premia, Review of Financial Studies 31 (February 2018): 399-448. Coauthored with Michael Bauer. Working paper version here. Data and code to replicate here.
Discussion of "Lower Bound Beliefs and Long-Term Interest Rates", International Journal of Central Banking 13 (September 2017): 203-212.
The Equilibrium Real Funds Rate: Past, Present and Future, IMF Economic Review 64 (November 2016): 660-707. Coauthored with Ethan Harris, Jan Hatzius and Kenneth West. Working paper version here. See Econbrowser for a short summary of the paper.
Effects of index-fund investing on commodity futures prices, International Economic Review, 56 (February 2015): 187-205. Coauthored with Jing Cynthia Wu. Working paper version here.
Risk Premia in Crude Oil Futures Prices, Journal of International Money and Finance, 42 (April 2014): 9-37. Coauthored with Jing Cynthia Wu. Working paper version here, data and replication code here.
Testable Implications of Affine-Term-Structure Models, Journal of Econometrics, 178, no. 2 (January 2014): 231-242. Coauthored with Jing Cynthia Wu. Working paper version here.
Crunch Time: Fiscal Crises and the Role of Monetary Policy, in Proceedings of the U.S. Monetary Policy Forum 2013, pp. 3-58. Initiative on Global Markets, Chicago Booth. Coauthored with David Greenlaw, Peter Hooper, and Frederic Mishkin. Working paper version here, executive summary here.
Identification and Estimation of Gaussian Affine Term Structure Models, Journal of Econometrics, 168, no. 2 (June 2012): 315-331. Coauthored with Jing Cynthia Wu. Working paper version here. Click here for software to implement these procedures
The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment, Journal of Money, Credit, and Banking, 44, no. 1 (Supplement, February 2012): 3-46. Coauthored with Jing Cynthia Wu. Working paper version here. Click here to access the database developed for this paper.
"Estimating the market-perceived monetary policy rule", American Economic Journal: Macroeconomics, July 2011, vol. 3, pp. 1-28. Co-authored with Seth Pruitt and Scott Borger. Working paper version here and a description of the paper written for a general audience can be found here.
"Sources of Variation in Holding Returns for Fed Funds Futures Contracts", Journal of Futures Markets, 2011, vol. 31, No. 3, pp. 205-229. Co-authored with Tatsuyoshi Okimoto. Working paper version here.
Assessing Monetary Policy Effects Using Daily Federal Funds Futures Contracts, Federal Reserve Bank of St. Louis Review, July/August 2008, pp. 377-393.
"A Model for the Federal Funds Rate Target," Journal of Political Economy, October 2002, vol. 110, pp. 1135-1167. Co-authored with Oscar Jorda. A working paper version can be downloaded as can the data and software used in the study.
"A Re-Examination of the Predictability of the Yield Spread for Real Economic Activity," Journal of Money, Credit, and Banking, May 2002, vol. 34, pp. 340-360. Co-authored with Dong Heon Kim Working paper version can be downloaded as can the data and software used in the study.
"The Supply and Demand for Federal Reserve Deposits," Carnegie-Rochester Conference Series on Public Policy, December 1998, vol. 49. Working paper version (missing figures and some mathematical symbols) can be downloaded, as can the data and software used in the study.
"Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, Sept.-Oct. 1996, vol. 11, no. 5, (coauthored with Gang Lin). Click here to download data and software
"The Daily Market for Federal Funds," Journal of Political Economy, Feb. 1996. Click here to download data and software
"Autoregressive Conditional Heteroskedasticity and Changes in Regime," Journal of Econometrics, September/October 1994 (coathored with Raul Susmel). Click here to download data and software.
"Long Swings in the Dollar: Are They in the Data and Do Markets Know It?", American Economic Review, Sept. 1990 (coauthored with Charles Engel). Click here to download data and software.
"Rational Expectations Econometric Analysis of Changes in Regime: An Investigation of the Term Structure of Interest Rates," Journal of Economic Dynamics and Control, June/Sept. 1988