From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective

Bundick, Brent; Petrosky-Nadeau, Nicolas

doi:10.18651/rwp2021-04

Cited by 2 publications

References 31 publications

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The Deflationary Bias of the ZLB and the FED's Strategic Response

PENALVER,

SIENA

2024

J of Money Credit Banking

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The paper shows, in a simple analytical framework, the existence of a deflationary bias in an economy with a low natural rate of interest, a zero lower bound (ZLB) constraint on nominal interest rates and a discretionary Central Bank (CB) with an inflation mandate. The presence of the ZLB prevents the CB from offsetting negative shocks to inflation whereas it can offset positive shocks. This asymmetry pushes average inflation below the target which in turn drags down inflation expectations and reinforces the likelihood of hitting the ZLB. We show that this deflationary bias is particularly relevant for a CB with a symmetric dual mandate (i.e., minimizing deviations from inflation and employment), especially when facing demand shocks. But a strict inflation targeter cannot escape the suboptimal deflationary equilibrium either. The deflationary bias can be mitigated by targeting “shortfalls” instead of “deviations” from maximum employment and/or using flexible average inflation targeting. However, changing monetary policy strategy risks inflation expectations becoming entrenched above the target if the natural interest rate increases.

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The Deflationary Bias of the ZLB and the FED's Strategic Response

PENALVER,

SIENA

2024

J of Money Credit Banking

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Can Supply Shocks Be Inflationary with a Flat Phillips Curve?

L'Huillier,

Phelan

2023

Working Paper (Federal Reserve Bank of Cleveland)

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Not in standard models. With conventional pricing frictions, imposing a flat Phillips curve also imposes a price level that is rigid with respect to supply shocks. In the New Keynesian model, price markup shocks need to be several orders of magnitude bigger than other shocks in order to fit the data, leading to unreasonable assessments of the magnitude of the increase in costs during inflationary episodes. To account for the facts, we propose a strategic microfoundation of shock-dependent price stickiness: prices are sticky with respect to demand shocks but flexible with respect to supply shocks. This friction is demand-intrinsic, in line with narrative accounts for the imperfect adjustment of prices. Firms can credibly justify a price increase due to a rise in costs, whereas it is harder to do so when demand increases. Inflation from supply shocks is efficient and does not justify a monetary policy response.

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From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective

Cited by 2 publications

References 31 publications

The Deflationary Bias of the ZLB and the FED's Strategic Response

The Deflationary Bias of the ZLB and the FED's Strategic Response

Can Supply Shocks Be Inflationary with a Flat Phillips Curve?

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