Central bank research hub - Papers by John C. Williams
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Research hub papers by author John C. WilliamsenTying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates
https://www.frbsf.org/economic-research/files/wp2019-14.pdf
Federal Reserve Bank of San Francisco Working Papers by Thomas M. Mertens and John C. WilliamsTying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates2019-05-01T00:00:14ZThis paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, dynamic strategies that raise inflation expectations by keeping interest rates "lower for longer" after periods of low inflation can both anchor expectations at the target level and further reduce the effects of the lower bound on the economy.Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest RatesFull texthttps://www.frbsf.org/economic-research/files/wp2019-14.pdfThomas M. MertensJohn C. WilliamsThomas M. Mertens and John C. Williams2019-05-01Federal Reserve Bank of San Francisco Working PapersE52Tying down the anchor: monetary policy rules and the lower bound on interest rates
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr887.pdf
Federal Reserve Bank of New York Staff Reports by Thomas M. Mertens and John C. WilliamsTying down the anchor: monetary policy rules and the lower bound on interest rates2019-05-01T00:00:07ZThis paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, dynamic strategies that raise inflation expectations by keeping interest rates "lower for longer" after periods of low inflation can both anchor expectations at the target level and further reduce the effects of the lower bound on the economy.Tying down the anchor: monetary policy rules and the lower bound on interest ratesFull texthttps://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr887.pdfThomas M. MertensJohn C. WilliamsThomas M. Mertens and John C. Williams2019-05-01Federal Reserve Bank of New York Staff ReportsE52Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates
https://www.frbsf.org/economic-research/files/wp2019-01.pdf
Federal Reserve Bank of San Francisco Working Papers by Thomas M. Mertens and John C. WilliamsMonetary Policy Frameworks and the Effective Lower Bound on Interest Rates2019-01-11T00:00:00ZThis paper applies a standard New Keynesian model to analyze the effects of monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, a dynamic strategy such as price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at the target level and potentially further reduce the effects of the lower bound on the economy.Monetary Policy Frameworks and the Effective Lower Bound on Interest RatesFull texthttps://www.frbsf.org/economic-research/files/wp2019-01.pdfThomas M. MertensJohn C. WilliamsThomas M. Mertens and John C. Williams2019-01-11Federal Reserve Bank of San Francisco Working PapersE52Monetary policy frameworks and the effective lower bound on interest rates
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr877.pdf
Federal Reserve Bank of New York Staff Reports by Thomas M. Mertens and John C. WilliamsMonetary policy frameworks and the effective lower bound on interest rates2019-01-01T00:07:07ZThis paper applies a standard New Keynesian model to analyze the effects of monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will become anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, a dynamic strategy such as price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at the target level and potentially further reduce the effects of the lower bound on the economy.Monetary policy frameworks and the effective lower bound on interest ratesFull texthttps://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr877.pdfThomas M. MertensJohn C. WilliamsThomas M. Mertens and John C. Williams2019-01-01Federal Reserve Bank of New York Staff ReportsE52What to expect from the lower bound on interest rates: evidence from derivatives prices
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr865.pdf
New York Fed Staff reports by Thomas M. Mertens and John C. WilliamsWhat to expect from the lower bound on interest rates: evidence from derivatives prices2018-08-01T00:06:05ZThis paper analyzes the effects of the lower bound for interest rates on the distributions of expectations for future inflation and interest rates. We study a stylized New Keynesian model where the policy instrument is subject to a lower bound to motivate the empirical analysis. Two equilibria emerge: In the "target equilibrium," policy is unconstrained most or all of the time, whereas in the "liquidity trap equilibrium," policy is mostly or always constrained. We use options data on future interest rates and inflation to study whether the decrease in the natural rate of interest leads to forecast densities consistent with the theoretical model. We develop a lower bound indicator that captures the effects of the lower bound on the distribution of interest rates. Qualitatively, we find that the evidence is largely consistent with the theoretical predictions in the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. Quantitatively, while the lower bound has a sizable effect on the distribution of future interest rates, its impact on forecast densities for inflation is relatively modest.What to expect from the lower bound on interest rates: evidence from derivatives pricesFull texthttps://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr865.pdfThomas M. MertensJohn C. WilliamsThomas M. Mertens and John C. Williams2018-08-01Federal Reserve Bank of New York Staff ReportsE43E52G12What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices
https://www.frbsf.org/economic-research/files/wp2018-03.pdf
San Francisco Fed Working Papers by Thomas M. Mertens and John C. WilliamsWhat to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices2018-01-18T00:00:00ZThis paper analyzes the effects of the lower bound for interest rates on the distributions of expectations for future inflation and interest rates. We use a stylized model economy where the policy instrument is subject to a lower bound to motivate the empirical analysis. Two equilibria emerge: In the "target equilibrium," policy is unconstrained most or all of the time, whereas in the "liquidity trap equilibrium," policy is mostly or always constrained. We use options data on future interest rates and inflation to study whether the decrease in the natural rate of interest leads to forecast densities consistent with the theoretical model. We develop a lower bound indicator that captures the effects of the lower bound on the distribution of interest rates. Qualitatively, we find that evidence is largely consistent with the theoretical predictions in the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. Quantitatively, while the lower bound has a sizable effect on the distribution of future interest rates, its impact on forecast densities for inflation is relatively modest.What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives PricesFull texthttps://www.frbsf.org/economic-research/files/wp2018-03.pdfThomas M. MertensJohn C. WilliamsThomas M. Mertens and John C. Williams2018-01-18Federal Reserve Bank of San Francisco Working PapersE52Measuring the Natural Rate of Interest: International Trends and Determinants
http://www.frbsf.org/economic-research/files/wp2016-11.pdf
San Francisco Fed Working Papers by Kathryn Holston, Thomas Laubach, John C. WilliamsMeasuring the Natural Rate of Interest: International Trends and Determinants2016-12-19T12:37:00ZU.S. estimates of the natural rate of interestthe real short-term interest rate that would prevail absent transitory disturbanceshave declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economiesCanada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.Measuring the Natural Rate of Interest: International Trends and DeterminantsFull texthttp://www.frbsf.org/economic-research/files/wp2016-11.pdfKathryn HolstonJohn C. WilliamsThomas LaubachKathryn Holston, Thomas Laubach, John C. Williams2016-12Federal Reserve Bank of San Francisco Working PapersC32E43E52O40Measuring the Natural Rate of Interest: International Trends and Determinants
http://www.federalreserve.gov/econresdata/feds/2016/files/2016073pap.pdf
Board of Governors of the Federal Reserve System FEDS series by Kathryn Holston, Thomas Laubach, and John C. WilliamsMeasuring the Natural Rate of Interest: International Trends and Determinants2016-09-07T17:38:00ZU.S. estimates of the natural rate of interest the real short-term interest rate that would prevail absent transitory disturbances have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.Measuring the Natural Rate of Interest: International Trends and DeterminantsFull texthttp://www.federalreserve.gov/econresdata/feds/2016/files/2016073pap.pdfKathryn HolstonJohn C. WilliamsThomas LaubachKathryn Holston, Thomas Laubach, and John C. Williams2016-09Board of Governors of the Federal Reserve System Finance and Economics Discussion SeriesC32C43E52O40Measuring the Natural Rate of Interest Redux
http://www.federalreserve.gov/econresdata/feds/2016/files/2016011pap.pdf
Board of Governors of the Federal Reserve System FEDS series by Thomas Laubach and John C. WilliamsMeasuring the Natural Rate of Interest Redux2016-02-01T13:37:00ZPersistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.Measuring the Natural Rate of Interest ReduxFull texthttp://www.federalreserve.gov/econresdata/feds/2016/files/2016011pap.pdfJohn C. WilliamsThomas LaubachThomas Laubach and John C. Williams2016-02Board of Governors of the Federal Reserve System Finance and Economics Discussion SeriesMeasuring the Natural Rate of Interest Redux
http://www.frbsf.org/economic-research/files/wp2015-16.pdf
San Francisco Fed Working Papers by Thomas Laubach and John C. WilliamsMeasuring the Natural Rate of Interest Redux2015-10-31T12:37:00ZPersistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.Measuring the Natural Rate of Interest ReduxFull texthttp://www.frbsf.org/economic-research/files/wp2015-16.pdfJohn C. WilliamsThomas LaubachThomas Laubach and John C. Williams2015-10-31Federal Reserve Bank of San Francisco Working PapersA Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment
http://www.frbsf.org/economic-research/publications/working-papers/wp2014-14.pdf
San Francisco Fed Working Papers by Glenn D. Rudebusch and John C. WilliamsA Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment2014-05-29T06:19:00ZIn standard macroeconomic models, the two objectives in the Federal Reserves dual mandatefull employment and price stabilityare closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not affect price inflation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.A Wedge in the Dual Mandate: Monetary Policy and Long-Term UnemploymentFull texthttp://www.frbsf.org/economic-research/publications/working-papers/wp2014-14.pdfGlenn D. RudebuschJohn C. WilliamsGlenn D. Rudebusch, John C. Williams2014-05Federal Reserve Bank of San Francisco Working PapersMeasuring the Effect of the Zero Lower Bound on Yields and Exchange Rates in the U.K. and Germany
http://www.frbsf.org/economic-research/publications/working-papers/economic-research/files/wp2013-21.pdf
San Francisco Fed Working Papers by Eric T. Swanson, John C. WilliamsMeasuring the Effect of the Zero Lower Bound on Yields and Exchange Rates in the U.K. and Germany2013-08-23T06:21:00ZThe zero lower bound on nominal interest rates began to constrain many central banks setting of short-term interest rates in late 2008 or early 2009. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the monetary policy rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we apply the methods of Swanson and Williams (2013) to medium- and longer-term yields and exchange rates in the U.K. and Germany. In particular, we compare the sensitivity of these rates to macroeconomic news during periods when short-term interest rates were very low to that during normal times. We find that: 1) USD/GBP and USD/EUR exchange rates have been essentially unaffected by the zero lower bound, 2) yields on German bunds were essentially unconstrained by the zero bound until late 2012, and 3) yields on U.K. gilts were substantially constrained by the zero lower bound in 2009 and 2012, but were surprisingly responsive to news in 201011. We compare these findings to the U.S. and discuss their broader implications.Measuring the Effect of the Zero Lower Bound on Yields and Exchange Rates in the U.K. and GermanyFull texthttp://www.frbsf.org/economic-research/publications/working-papers/economic-research/files/wp2013-21.pdf'Eric T. SwansonJohn C. WilliamsEric T. Swanson, John C. Williams2013-08Federal Reserve Bank of San Francisco Working PapersA Defense of Moderation in Monetary Policy
http://www.frbsf.org/economic-research/publications/working-papers/economic-research/files/wp2013-15.pdf'
San Francisco Fed Working Papers by July 2013A Defense of Moderation in Monetary Policy2013-07-11T10:43:00ZThis paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.A Defense of Moderation in Monetary PolicyFull texthttp://www.frbsf.org/economic-research/publications/working-papers/economic-research/files/wp2013-15.pdf'John C. WilliamsJohn C. Williams2013-07Federal Reserve Bank of San Francisco Working PapersMeasuring the Effect of the Zero Lower Bound On Medium- and Longer-Term Interest Rates
http://www.frbsf.org/publications/economics/papers/2012/wp12-02bk.pdf
San Francisco Fed Working Papers by Eric T. Swanson, John C. WilliamsMeasuring the Effect of the Zero Lower Bound On Medium- and Longer-Term Interest Rates2012-02-14T17:38:59ZThe zero lower bound has constrained the Federal Reserve's setting of the overnight federal funds rate for over three years running, but economic theory implies that the economy is more closely tied to the behavior of medium- and longer-term interest rates. In this paper, we develop a novel approach to measure when and to what extent the zero lower bound affects interest rates of any maturity. Our results have implications for both fiscal and monetary policy.Measuring the Effect of the Zero Lower Bound On Medium- and Longer-Term Interest RatesFull texthttp://www.frbsf.org/publications/economics/papers/2012/wp12-02bk.pdfEric T. SwansonJohn C. WilliamsEric T. Swanson, John C. Williams2012-02-13Federal Reserve Bank of San Francisco Working PapersHave We Underestimated the Likelihood and Severity of Zero Lower Bound Events?
http://www.frbsf.org/publications/economics/papers/2011/wp11-01bk.pdf
San Francisco Fed Working Papers by Hess Chung, Jean-Philippe Laforte, David Reifschneider, John C. WilliamsHave We Underestimated the Likelihood and Severity of Zero Lower Bound Events?2011-01-08T06:25:00ZThis paper examines the effects of the zero lower bound on interest rates in the wake of the financial crisis. We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models. We identify a number of factors that help to account for the degree to which models were surprised by recent events. We show that the ZLB probably had a first-order impact on macroeconomic outcomes in the United States. Finally, we find that the Federal Reserve's asset purchases have been effective at mitigating the economic costs of the ZLB.Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?Full texthttp://www.frbsf.org/publications/economics/papers/2011/wp11-01bk.pdfJean-Philippe LaforteHess T. ChungJohn C. WilliamsDavid ReifschneiderHess Chung, Jean-Philippe Laforte, David Reifschneider, John C. Williams2011-01-07Federal Reserve Bank of San Francisco Working PapersMonetary Policy Mistakes and the Evolution of Inflation Expectations
http://www.frbsf.org/publications/economics/papers/2010/wp10-12bk.pdf
San Francisco Fed Working Papers by Orphanides, WilliamsMonetary Policy Mistakes and the Evolution of Inflation Expectations2010-05-29T06:29:59ZWhat monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? We use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. We show that policies constructed using modern optimal control techniques aimed at stabilizing inflation, economic activity, and interest rates would have succeeded in achieving a high degree of economic stability as well as price stability only if the Federal Reserve had possessed excellent information regarding the structure of the economy or if it had acted as if it placed relatively low weight on stabilizing the real economy. Neither condition held true. We document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. We show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Finally, we show that a strategy of following a robust first-difference policy rule would have been highly successful in the presence of informational imperfections. This robust monetary policy rule yields simulated outcomes that are close to those seen during the period of the Great Moderation starting in the mid-1980s.Monetary Policy Mistakes and the Evolution of Inflation ExpectationsFull texthttp://www.frbsf.org/publications/economics/papers/2010/wp10-12bk.pdfOrphanidesJohn C. WilliamsOrphanides, Williams2010-05Federal Reserve Bank of San Francisco Working PapersE52Simple and Robust Rules for Monetary Policy
http://www.frbsf.org/publications/economics/papers/2010/wp10-10bk.pdf
San Francisco Fed Working Papers by Taylor, WilliamsSimple and Robust Rules for Monetary Policy2010-04-10T06:29:59ZThis paper focuses on simple normative rules for monetary policy which central banks can use to guide their interest rate decisions. Such rules were first derived from research on empirical monetary models with rational expectations and sticky prices built in the 1970s and 1980s. During the past two decades substantial progress has been made in establishing that such rules are robust. They perform well with a variety of newer and more rigorous models and policy evaluation methods. Simple rules are also frequently more robust than fully optimal rules. Important progress has also been made in understanding how to adjust simple rules to deal with measurement error and expectations. Moreover, historical experience has shown that simple rules can work well in the real world in that macroeconomic performance has been better when central bank decisions were described by such rules. The recent financial crisis has not changed these conclusions, but it has stimulated important research on how policy rules should deal with asset bubbles and the zero bound on interest rates. Going forward the crisis has drawn attention to the importance of research on international monetary issues and on the implications of discretionary deviations from policy rules.Simple and Robust Rules for Monetary PolicyFull texthttp://www.frbsf.org/publications/economics/papers/2010/wp10-10bk.pdfJohn B. TaylorJohn C. WilliamsTaylor, Williams2010-04Federal Reserve Bank of San Francisco Working PapersHeeding Daedalus: Optimal Inflation and the Zero Lower Bound
http://www.frbsf.org/publications/economics/papers/2009/wp09-23bk.pdf
San Francisco Fed Working Papers by WilliamsHeeding Daedalus: Optimal Inflation and the Zero Lower Bound2009-10-26T12:45:00ZThis paper reexamines the implications of the zero lower bound on interest rates for monetary policy and the optimal choice of steady-state inflation in light of the experience of the recent global recession. There are two main findings. First, the zero lower bound did not materially contribute to the sharp declines in output in the United States and many other economies through the end of 2008, but it is a significant factor slowing recovery. Model simulations imply that an additional 4 percentage points of rate cuts would have kept the unemployment rate from rising as much as it has and would bring the unemployment and inflation rates more quickly to steady-state values, but the zero bound precludes these actions. This inability to lower interest rates comes at the cost of $1.7 trillion of foregone output over four years. Second, if recent events are a harbinger of a significantly more adverse macroeconomic climate than experienced over the preceding two decades, then a 2 percent steady-state inflation rate may provide an inadequate buffer to keep the zero bound from having noticeable deleterious effects on the macroeconomy assuming the central bank follows the standard Taylor Rule. In such an adverse environment, stronger systematic countercyclical fiscal policy and/or alternative monetary policy strategies can mitigate the harmful effects of the zero bound with a 2 percent inflation target. However, even with such policies, an inflation target of 1 percent or lower could entail significant costs in terms of macroeconomic volatility.Heeding Daedalus: Optimal Inflation and the Zero Lower BoundFull texthttp://www.frbsf.org/publications/economics/papers/2009/wp09-23bk.pdfJohn C. WilliamsWilliams2009-10Federal Reserve Bank of San Francisco Working PapersImperfect Knowledge And The Pitfalls Of Optimal Control Monetary Policy
http://www.bcentral.cl/eng/studies/working-papers/pdf/dtbc499.pdf
Central Bank of Chile Working Papers by Athanasios Orphanides; John C. WilliamsImperfect Knowledge And The Pitfalls Of Optimal Control Monetary Policy2008-11-03T17:38:00ZThis paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations formation and uncertainty about the natural rates of interest and unemployment. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We also allow for central bank uncertainty regarding the natural rates of interest and unemployment. We find that the optimal control policy derived under the assumption of rational expectations performs rather poorly when agents learn. These problems are exacerbated by natural rate uncertainty, even< when the central bank's natural rates are efficient. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to the alternative models of learning that we study and natural rate uncertainty and outperform the optimal control policy for empirically plausible parameterizations of the learning and natural rates models.Imperfect Knowledge And The Pitfalls Of Optimal Control Monetary PolicyAbstracthttp://www.bcentral.cl/eng/studies/working-papers/499.htmFull texthttp://www.bcentral.cl/eng/studies/working-papers/pdf/dtbc499.pdfJohn C. WilliamsAthanasios OrphanidesAthanasios Orphanides; John C. Williams2008-10Central Bank of Chile Working PapersImperfect Knowledge and the Pitfalls of Optimal Control Monetary Policy
http://www.frbsf.org/publications/economics/papers/2008/wp08-09bk.pdf
San Francisco Fed Working Papers by Orphanides, WilliamsImperfect Knowledge and the Pitfalls of Optimal Control Monetary Policy2008-07-24T07:16:59ZThis paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations formation and uncertainty about the natural rates of interest and unemployment. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We also allow for central bank uncertainty regarding the natural rates of interest and unemployment. We find that the optimal control policy derived under the assumption of perfect knowledge about the structure of the economy can perform poorly when knowledge is imperfect. These problems are exacerbated by natural rate uncertainty, even when the central bank's estimates of natural rates are efficient. We show that the optimal control approach can be made more robust to the presence of imperfect knowledge by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to the presence of imperfect knowledge about the economy provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to the alternative models of learning that we study and natural rate uncertainty and outperform the optimal control policy and generally perform as well as the robust optimal control policy that places less weight on stabilizing economic activity and interest rates.Imperfect Knowledge and the Pitfalls of Optimal Control Monetary PolicyFull texthttp://www.frbsf.org/publications/economics/papers/2008/wp08-09bk.pdfOrphanidesJohn C. WilliamsOrphanides, Williams2008-07Federal Reserve Bank of San Francisco Working PapersLearning, Expectations Formation and the Pitfalls of Optimal Control Monetary Policy
http://www.frbsf.org/publications/economics/papers/2008/wp08-05bk.pdf
San Francisco Fed Working Papers by Orphanides, WilliamsLearning, Expectations Formation and the Pitfalls of Optimal Control Monetary Policy2008-05-17T07:16:00ZThis paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We find that the optimal control policy derived under the assumption of rational expectations can perform poorly when expectations deviate modestly from rational expectations. We then show that the optimal control policy can be made more robust by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to learning provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to empirically plausible parameterizations of the learning models and perform about as well or better than optimal control policies.Learning, Expectations Formation and the Pitfalls of Optimal Control Monetary PolicyFull texthttp://www.frbsf.org/publications/economics/papers/2008/wp08-05bk.pdfOrphanidesJohn C. WilliamsOrphanides, Williams2008-04Federal Reserve Bank of San Francisco Working PapersE52A Black Swan in the Money Market
http://www.frbsf.org/publications/economics/papers/2008/wp08-04bk.pdf
San Francisco Fed Working Papers by Taylor, WilliamsA Black Swan in the Money Market2008-04-10T07:16:59ZAt the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions--including the introduction of a new term auction facility (TAF)--to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.A Black Swan in the Money MarketFull texthttp://www.frbsf.org/publications/economics/papers/2008/wp08-04bk.pdfJohn B. TaylorJohn C. WilliamsTaylor, Williams2008-04Federal Reserve Bank of San Francisco Working PapersWelfare-Maximizing Monetary Policy under Parameter Uncertainty
http://www.federalreserve.gov/pubs/feds/2007/200756/200756abs.html
Board of Governors of the Federal Reserve System FEDS series by Rochelle M. Edge, Thomas Laubach, and John C. WilliamsWelfare-Maximizing Monetary Policy under Parameter Uncertainty2007-10-31T07:12:00ZWelfare-Maximizing Monetary Policy under Parameter UncertaintyAbstracthttp://www.federalreserve.gov/pubs/feds/2007/200756/200756abs.htmlThomas LaubachJohn C. WilliamsRochelle M. EdgeRochelle M. Edge, Thomas Laubach, and John C. Williams2007-10Board of Governors of the Federal Reserve System Finance and Economics Discussion SeriesForecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve
http://www.frbsf.org/publications/economics/papers/2007/wp07-16bk.pdf
San Francisco Fed Working Papers by Rudebusch, WilliamsForecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve2007-08-16T07:12:59ZWe show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy.Forecasting Recessions: The Puzzle of the Enduring Power of the Yield CurveFull texthttp://www.frbsf.org/publications/economics/papers/2007/wp07-16bk.pdfGlenn D. RudebuschJohn C. WilliamsRudebusch, Williams2007-07Federal Reserve Bank of San Francisco Working PapersRobust Monetary Policy with Imperfect Knowledge
http://www.federalreserve.gov/pubs/feds/2007/200733/200733pap.pdf
Board of Governors of the Federal Reserve System FEDS series by Athanasios Orphanides and John C. WilliamsRobust Monetary Policy with Imperfect Knowledge2007-08-08T07:12:00Z*** Warning - contains HTML ***Robust Monetary Policy with Imperfect KnowledgeAbstracthttp://www.federalreserve.gov/pubs/feds/2007/200733/200733abs.htmlFull texthttp://www.federalreserve.gov/pubs/feds/2007/200733/200733pap.pdfJohn C. WilliamsAthanasios OrphanidesAthanasios Orphanides and John C. Williams2007-08Board of Governors of the Federal Reserve System Finance and Economics Discussion SeriesE52