No abstract

Prior to the financial crisis, most economists probably did not view the zero lower bound (ZLB) as a major problem for central banks. Using a range of structural and statistical models, we find that previous research understated the ZLB threat by ignoring uncertainty about model parameters and latent variables, focusing too much on the Great Moderation experience, and relying on structural models whose dynamics cannot generate sustained ZLB episodes. Our analysis also suggests that the Federal Reserve's asset purchases, while materially improving macroeconomic conditions, did not prevent the ZLB constraint from having first-order adverse effects on real activity and inflation.JEL codes: E37, E47, E52, E58, E65

This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples-based around the evolution of natural rates of production and interest-of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts.

SUMMARYThis paper considers the 'real-time' forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model-the Federal Reserve Board's Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 to 2004. We find that the Edo model can provide forecasts that are competitive with those of Federal Reserve staff. Taken together with the fact that the Edo model has also proved useful in answering a range of policy questions, this suggests a significant and broad role for richly specified DSGE models in the toolbox of central bank models.

This paper compares and estimates three pricing mechanisms in the context of a small DSGE model of the U.S. economy. We interpret our results as favoring the pricing mechanism presented in Wolman (1999 Wolman model) over the New Keynesian model with indexation (Gali and Gertler 1999, Smets and Wouters 2004a) and the sticky information model of Mankiw and Reis (2002). The key factor that explains the performance of the Wolman model is that the data reject the key assumption of the New Keynesian model that the firm's probability of price change is constant over time and independent of the contract's vintage. Our results also show that incorporating indexation in the New Keynesian model represents a poor expedient in matching the autocorrelation function of the inflation process over the last 20 years. Copyright 2007 The Ohio State University.