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Press Releases


November

Featuring research published in October 2010

Speeches

The Challenges of Monetary Policy in Today's Economy
Oct. 18, 2011
Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, comments on quantitative easing and monetary policy to the Rotary Club of Savannah, Ga.

Macroeconomics

Entry Cost, Financial Friction, and Cross-Country Differences in Income and TFP
Economic Review
This article reviews loss mitigation tools that mortgage lenders and policymakers have employed in the past few years. The authors then review the theoretical academic literature, including more recent empirical literature generated by the recent foreclosure crisis. Given the limited success of government loan modification programs, the authors believe that policymakers will likely turn their attention to alternatives. The authors point to signs that the focus is now shifting to programs that do not attempt to prevent foreclosures but rather try to help homeowners who have already experienced foreclosure.

Bridging Cyclical DSGE Models and the Raw Data
Workshop on Methods and Applications for Dynamic Stochastic General Equilibrium Models
The author proposes a method to estimate cyclical DSGE models using the raw data and shows that applying standard data transformation induces distortions in structural estimates and policy conclusions and explains the reasons for their emergence. The proposed approach recovers the features of the cyclical component in selected experimental designs.

Evaluating Interest Rate Rules in an Estimated DSGE Model
Workshop on Methods and Applications for Dynamic Stochastic General Equilibrium Models
The authors examine empirical DSGE literature in relation to the behavior of the monetary authority. They find that specifications in which monetary policy responds to inflation and to deviations of output from its efficient level—the one that would prevail in the absence of distortions—have the worst fit within the set they consider. Policies that respond to measures of the output gap based on statistical filters perform better, but the best fitting rules are those that also track the evolution of the model-consistent efficient real interest rate.

Measuring Prior Sensitivity and Prior Informativeness in Large Bayesian Models
Workshop on Methods and Applications for Dynamic Stochastic General Equilibrium Models
This paper derives measures of prior sensitivity and prior informativeness for posterior results in large Bayesian models that account for the high dimensional interaction between prior and likelihood information. The basis for both measures is the derivative matrix of the posterior mean with respect to the prior mean. An application to Smets and Woutersâ?? (2007) dynamic stochastic general equilibrium model shows that for many structural parameters, the prior is very informative, and posterior means are quite sensitive to changes in prior means. In contrast, the prior plays a much less important role for key impulse responses and variance decompositions.

Firm Risk and Leverage-Based Business Cycles
Workshop on Methods and Applications for Dynamic Stochastic General Equilibrium Models
The author reviews cyclical fluctuations in the cross-sectional dispersion of firm-level productivity, and characterizes cyclical fluctuations in aggregate leverage ratios, along with the debt and equity components separately, in the U.S. non-financial corporate sector. Using the estimated dispersion, or "risk," stochastic process as an input to a baseline DSGE financial-accelerator model, the author assesses how well the model explains business-cycle movements in the financial conditions of nonfinancial firms. In the model, risk shocks calibrated to micro data induce large fluctuations in leverage, a financial measure typically thought to be closely associated with real activity. Hence, the results suggest a type of dichotomy present at the core of a standard class of DSGE financial frictions models: risk shocks lead to large financial fluctuations, but these are largely isolated from macro fluctuations.

New Keynesian Dynamics in a Low Interest Rate Environment
Workshop on Methods and Applications for Dynamic Stochastic General Equilibrium Models
The authors review research on the dynamics of the New Keynesian model when the nominal interest rate is zero. They consider the empirical relevance of these findings using Japanese data. A prototypical New Keynesian model calibrated to Japan and solved using nonlinear methods exhibits orthodox dynamics with a government purchase multiplier that is less than one.

Risk Aversion and the Labor Margin in Dynamic Equilibrium Models
Workshop on Methods and Applications for Dynamic Stochastic General Equilibrium Models
This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring this margin can wildly overstate the household's true aversion to risk. Risk premia on assets priced with the stochastic discount factor increase essentially linearly with risk aversion, so measuring risk aversion correctly is crucial for asset pricing in the model. Closed-form expressions for risk aversion in models with generalized recursive preferences and internal and external habits are also derived.

Podcasts

Communication: The Key to Guiding Southeast Banks through Tumultuous Times (MP3 6:44)
Financial Update Focus
Michael Johnson, the Atlanta Fed's senior vice president of supervision and regulation, discusses the importance of communication between the banking industry and bank supervisors in these tumultuous times, as well as the new online Financial Update feature, "ViewPoint," a tool for communicating supervisory priorities and challenges as well as banking conditions in the Southeast.