Suchergebnisse

Forecasters' projections of interest rates vary a great deal. We use a Taylor rule to investigate two possible reasons why. Namely, do differences arise because forecasters have different projections for output growth or inflation, or do they arise because forecasters follow different guidelines to predict what the Federal Reserve will do with the federal funds rate? We find evidence for both explanations. Forecasters appear to use very different projections for inflation and output growth, but they also seem to use dramatically different Taylor rule coefficients.

A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way—by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly.

In this paper we study the quantitative impact of marginal tax rates on the distribution of income. Our methodology builds on computable general-equilibrium framework. We find that distortions from marginal tax rate changes of the sort implied by the Tax Reform Act of 1986 have sizable effects on income inequality in a reasonably quantified life-cycle setting: In our model rate changes alone capture half the increase in the pretax Gini that actually occurred between 1984 and 1989. (JEL C68, D31, H30, H20)

The Taylor rule suggests that the federal funds rate should be adjusted when inflation deviates from the Fed's inflation target or when output deviates from the Fed's estimate of potential output. Typical formulations of the rule assume that the level of the inflation-adjusted federal funds rate that is expected to prevail in the long run, sometimes thought of as the "natural" rate of interest, is constant over time. Since this assumption is likely incorrect, we show how the Taylor rule can account for a variable natural rate by incorporating long-term productivity growth. We also show that better monetary policy outcomes may be achieved if the Fed regularly adjusts the funds rate in response to perceived changes in productivity growth, even if these changes are often measured with error.

A Taylor rule captures the historical behavior of the federal funds rate better when it also includes a partial-adjustment factor. Typically, the type of partial adjustment added is consistent with the FOMC avoiding large jumps in the level of the funds rate. We add another type of partial adjustment—consistent with the FOMC avoiding changes in the pace of change and improve the rule's historical fit.

There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.

The idea that the monetary authority cannot achieve price stability except at the cost of a recession is the most common and convincing argument against price stability. This paper presents calculations showing that the resource costs of a recession that might result from eliminating a 4 percent inflation are approximately equal to the "shoe leather" costs incurred when inflation is stable at 4 percent.