Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of monetary policy, in which the interest rate tracks the Wicksellian...

Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate...

We simulate the Federal Reserve second Large-Scale Asset Purchase program in a DSGE model with bond market segmentation estimated on U.S. data. GDP growth increases by less than a third of a percentage point and inflation barely changes relative to the absence of intervention. The key reasons...

The Federal Reserve’s large-scale purchases of long-term Treasury securities most likely provided a moderate boost to economic growth and inflation. Importantly, the effects appear to depend greatly on the Fed’s guidance that short-term interest rates would remain low for an extended period....

The empirical DSGE literature pays surprisingly little attention to the behavior of the monetary authority. Alternative policy rule specifications abound but their relative merit is rarely discussed. We provide some of this discussion by comparing the fit of a large set of interest rate rules...

The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the US Federal Reserve second Large-Scale Asset Purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and...

3) In light of the model, is the rapid decline in the Fed Funds Rate in 2007-2008 justified by the recent turmoil in financial markets?

We explore the implications of current account adjustment for monetary policy within a simple two-country DSGE model. Our framework nests Obstfeld and Rogoff’s (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic...