I estimate the macroeconomic effects of two critical aspects of Federal Reserve (Fed) communications: forward guidance regarding the path of interest rates and the provision of macroeconomic information. To estimate these effects, I identify two new series of shocks: monetary policy shocks and information shocks. I recover the shocks by estimating a model of how Fed announcements determine interest-rate and GDP expectations in high frequency, using a measure of GDP forecast revisions I construct from the text of newspaper articles. To identify the model, I use a discrete change in the Fed's communication policy: the introduction of interest-rate forward guidance. I find that the identified monetary shock has macroeconomic effects that are consistent with New Keynesian models, and fall at the upper end of previous estimates. Additionally, information shocks resemble aggregate demand shocks and have effects of similar (absolute) magnitude as monetary shocks, which highlights the importance of the Fed's role in providing macroeconomic information.
Previously circulated as FOMC Responses to Calls for Transparency. 2015. Finance and Economics Discussion Series.
Transparency has been posited as a channel through which monetary policy is made more effective. This paper presents a new time-varying measure of the transparency of Federal Reserve deliberations, derived from the documents that the Fed uses to record and summarize each of its meetings. The measure---the similarity of the minutes and transcripts of each Federal Open Market Committee (FOMC) meeting---is largely, though not entirely, shaped by FOMC leadership. Monetary policy shocks have about a 40 percent larger effect on nominal and real interest rates when the prevailing level of transparency is high, suggesting an important role for transparency in determining the efficacy of monetary policy. These effects are primarily driven by transparency about monetary policy strategies conditional on the state of the economy. A simple model of FOMC announcements consistent with these results highlights that high transparency enhances monetary policy's effectiveness by increasing the FOMC's signaling ability, but diminishes the ability for policymakers to generate market surprises.
WORKS IN PROGRESS
We estimate the effect of Unemployment Insurance (UI) benefit extensions on unemployment during recessions using newly constructed data on state-level legislation and extensions over the period 1976-2021. We exploit variation in UI “trigger rule” options, which give rise to large and persistent differences in UI benefit durations across states. We find that UI extensions initially raise the number of people collecting UI, but subsequently lead the total unemployment rate to decline. Our estimates are similar for the Great Recession and pre-Great Recession periods. These results suggest that Keynesian forces may ultimately overcome the effects of UI extensions on the incentives for workers to work and firms to post vacancies.
Managing inflation expectations is an essential aspect of monetary policy. But how does communicating about inflation affect the decisions of price-setting firms? Cross-country evidence from randomized control trials provides a seemingly contradictory picture of how providing firms with news about inflation affects their decisions, where both contractionary and expansionary responses are observed. In this paper, we develop a rational inattention model that reconciles this evidence. In our model, firms’ optimal information sets do not allow them to fully distinguish between supply and demand shocks. Accordingly, the model predicts that an exogenous increase in inflation expectations should be contractionary for economies where supply shocks are more volatile, and vice versa. We find supporting evidence for this mechanism by comparing output-inflation correlations in the data. These findings highlight the significant role that the broad economic environment can play in determining the effects of information provision policies.
There is substantial variation in U.S. tariff rates within narrowly-defined goods. For example, tariff rates on handbags range from 5 to 16 percent, depending on their material. In this paper, we document the presence, historical origins, and consequences of this pattern. Using a newly-constructed dataset on legislated tariffs that covers all major trade agreements back to the 1930 Smoot-Hawley Act, we show that this within-good variation in tariffs originated in trade agreements made in the 1930 and 40s, and has persisted over time. Early trade agreements were made primarily with other high-income nations, and concessions were made on the specific varieties of goods that those countries produced. Instead, later GATT and WTO tariff negotiations had the broader focus of bringing down the average level of tariffs. One important consequence of this hysteresis in trade policy is that, today, tariffs are systematically higher on cheaper varieties of goods relative to their more expensive counterparts. We show that failing to take this heterogeneity into account substantially alters the distributional consequences of trade policy.
Using Occupation to Measure Intergenerational Mobility. With Bhashkar Mazumder. The ANNALS of the American Academy of Political and Social Science.
Scholarly investigations of intergenerational mobility typically focus on either the occupations of fathers and sons or their incomes. Using an identical sample of fathers and sons, we examine how estimates of intergenerational mobility in income and occupational prestige are affected by (1) measurement that uses long time averages and (2) varying the point in the life cycle when outcomes are measured. We find that intergenerational occupational mobility is overstated when using a single year of fathers’ occupation compared to a 10-year average centered on mid-career. We also find that for both income and occupation, mobility estimates are largest when sons are in their mid-career, suggesting that this may be the ideal period in which to measure their status. Finally, we see differences in the pattern of estimates across the two types of measures: for income, estimates of intergenerational persistence are highest when fathers are in their mid-career; for occupation, estimates are much larger when fathers’ occupations are accounted for late in their careers.