Marco Del Negro

• Federal Reserve Bank of New York

To provide insights into the processes that drive inflationary dynamics, the Federal Reserve Bank of Cleveland holds an annual conference on the topic of inflation: the Inflation: Drivers and Dynamics series. The 2020 installment of the conference was held on May 21-22, 2020. This Commentary summarizes the papers at the conference, which broadly fe...

We introduce the concept of financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sect...

This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating dynamic stochastic general equilibrium (DSGE) model posterior distributions. We show how the tempering schedule can be chosen adaptively, document the accuracy and runtime benefits of generalized data tempering for ‘online’ estimation (that is, re-estimat...

Thiis paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, document the accuracy and runtime benefits o fgeneralized data tempering for “online” estimation (that is, re-estimating a model asnew data become available)...

The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but instead generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound...

The trend in the world real interest rate for safe and liquid assets fluctuated close to 2% for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the...

The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, mor...

This Note summarizes analysis conducted in our recent FEDS working paper that seeks to understand the fiscal implications of the Federal Reserve's balance sheet normalization program.

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: can a shock to the liquidity of private paper lead to a collapse in short-Term nominal interest rates and a recession like the one associated with the 2008 US financial crisis? Once the nominal interest rate reaches the zero bound, what...

Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time series model of trends in Treasury and corp...

We apply a novel methodology for estimating time-varying weights in linear prediction pools, which we call Dynamic Pools, and use it to investigate the relative forecasting performance of DSGE models with and without financial frictions for output growth and inflation from 1992 to 2011. We find strong evidence of time variation in the pool’s weight...

Using a simple, general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance...

We apply a novel methodology for estimating time-varying weights in linear prediction pools, which we call Dynamic Pools, and use it to investigate the relative forecasting performance of DSGE models with and without financial frictions for output growth and inflation from 1992 to 2011. We find strong evidence of time variation in the pool’s weight...

Dynamic stochastic general equilibrium (DSGE) models use modern macroeconomic theory to explain and predict comovements of aggregate time series over the business cycle and to perform policy analysis. We explain how to use DSGE models for all three purposes – forecasting, story-telling, and policy experiments – and review their forecasting record....

It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession, and that models in which inflation depends on economic slack cannot explain the recent muted behavior of inflation, given the sharp drop in output that occurred in 2008-09. In this pa...

We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student's t-distribution. We show that the latter is favored by the data in the context of a Smets and Wouters-type model estimated on macro variables. The evidence is even stronger when we introduce financial frictions as in Bernan...

With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy — a phenomenon we call the “forward guidance puzzle.” We explain why thi...

Dynamic stochastic general equilibrium (DSGE) models use modern macroeconomic theory to explain and predict comovements of aggregate time series over the business cycle and to perform policy analysis. We explain how to use DSGE models for all three purposes — forecasting, story telling, and policy experiments — and review their forecasting record....

This article presents the challenges that arise since macroeconomists often work in data-rich environments. It emphasizes multivariate models that can capture the co-movements of macroeconomic time series analysis. It discusses vector autoregressive (VAR) models distinguishing between reduced-form and structural VARs. Reduced-form VARs summarize th...

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one as...

This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)-type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public’s information on, the central banks’ infl...

This note shows how to apply the procedure of Kim et al. (1998) to the estimation of VAR, DSGE, factor, and unobserved components models with stochastic volatility. In particular, it revisits the estimation algorithm of the time-varying VAR model of Primiceri (2005). The main difference of the new algorithm is the ordering of the various MCMC steps...

The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of t...

can be large at zero nominal interest rates. We show model simulations in which these policy interventions prevented a repeat of the Great Depression in 2008-2009.

We ask the following questions: (1) Can a standard Christiano et al. (2005)/ Smets and Wouters (2003) -type model, which can supposedly explain macro variables reasonably well, also describe the evolution of inflation expectations, as measured by forecasts from the Survey of Professional Forecasters? (2) If we augment the model with a plausible fea...

expectations? We find that the answer to both questions is negative: Standard medium scale DSGE models have difficulties explaining the evolution of inflation expectations, and that the fit is even worse when we introduce imperfect information.

We discuss prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models, and provide a method for constructing prior distributions for a subset of these parameters from beliefs about steady-state relationships and second moments of the endogenous variables. The empirical application documents how the specification of...

We develop a dynamic factor model with time-varying factor loadings and stochastic volatility in both the latent factors and idiosyncratic components. We employ this new measurement tool to study the evolution of international business cycles in the post-Bretton Woods period, using a panel of output growth rates for nineteen countries. We find 1) s...

This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Galí and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the d...

This paper discusses two sources of ideas that influence monetary policy makers today. The first is a set of analytical results that impose the rational expectations equilibrium concept and do 'intelligent design' by solving Ramsey and mechanism design problems. The second is the adaptive learning process that first taught us how to anchor the pric...

We use a dynamic factor model estimated on quarterly state-level data from 1986 to 2005 via Bayesian methods to disentangle the relative importance of the common component in OFHEO house price movements from local (state- or region-specific) shocks. We find that historically movements in house prices were mainly driven by the local component. The r...

The paper provides new tools for the evaluation of DSGE models, and applies them to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression, and then systematically relax the implied cross-equation...

In the constant search for better models to help guide policy decisions, central banks have begun to use and develop dynamic stochastic general equilibrium (DSGE) models. Although such models were until recently considered theoretically sound but overly restrictive, newly developed methods have proved successful in specifying DSGE models that fit t...

In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) models, prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or presample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it i...

An empirical regularity in the portfolio diversification literature is the importance of country effects in explaining international return variation. We develop a new decomposition that disaggregates these country effects into region effects and within-region country effects. We find that half the return variation typically attributed to country e...

This paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE 2005) and Smets and Wouters (JEEA 2003). Specifically, we are studying the effects of coefficient...

We estimate a latent factor model that decomposes international stock returns into global, country-, and industry-specific shocks and allows for stock-specific exposures to these shocks. We find that across stocks there is substantial dispersion in these exposures, which is partly explained by the extent to which firms operate across countries. We...

This paper uses a novel method for conducting policy analysis with potentially misspecified DSGE models and applies it to a simple New Keynesian DSGE model. We illustrate the sensitivity of the results to assumptions on the policy invariance of model misspecifications. (JEL: C32, E52) Copyright (c) 2005 The European Economic Association.

Using data on workers' flows into and out of employment, unemployment, and not-in-the-labor-force, I construct transition probabilities between "employment" and "unemployment" that can be used in the calibration of economies such as Krusell and Smith's (1998). I show that calibration in Krusell and Smith has some counterfactual features. Yet the ga...

(Copyright: Elsevier)

Using data on workers’ flows into and out of employment, unemployment, and not-in-the-labor-force, I construct transition probabilities between “employment” and “unemployment” that can be used in the calibration of economies such as Krusell and Smith’s (1998). I show that calibration in Krusell and Smith has some counterfactual features. Yet the ga...

Abstract We develop a dynamic factor model with time-varying factor loadings and stochas- tic volatility in both the latent factors and idiosyncratic components. We apply this novel measurement,tool to study the evolution of international business cycles during the post-Bretton Woods period in terms of changes in both volatility and synchro- nizati...

We introduce adaptive learning behavior into a general-equilibrium life-cycle economy with capital accumulation. Agents form forecasts of the rate of return to capital assets using least-squares autoregressions on past data. We show that, in contrast to the perfect-foresight dynamics, the dynamical system under learning possesses equilibria that ar...

The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economist...

We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in 20 countries, we estimate a factor model that decomposes stock returns into global, country-specific and industry-specific shocks. We find a large and highly significant link:...

This paper uses a modified version of the DSGE model estimated in Smets and Wouters (2003) to generate a prior distribution for a vector autoregression, following the approach in Del Negro and Schorfheide (2003). This DSGE-VAR is fitted to Euro area data on GDP, consumption, investment, nominal wages, hours worked,inflation, M2, and a short-term in...

This article uses a simple New Keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression, and shows that the resulting model is competitive with standard benchmarks in terms of forecasting, and can be used for policy analysis.

This article uses a simple New Keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression, and shows that the resulting model is competitive with standard benchmarks in terms of forecasting, and can be used for policy analysis. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka...

An empirical regularity in the portfolio diversification literature is the importance of country effects in explaining international return variation. We develop a new decomposition that disaggregates these country effects into region effects and within-region country effects. We find that half the return variation typically attributed to country e...

This paper considers a prototypical monetary business cycle model for the U.S. economy, in which the equilibrium is undetermined if monetary policy is `passive'. In previous multivariate studies it has been common practice to restrict parameter estimates to values for which the equilibrium is unique. We show how the likelihood-based estimation of d...

We explore the link between international stock market comovement and the extent to which firms operate globally. Using stock returns and balance sheet data for companies in 20 countries, we estimate a factor model that decomposes stock returns into global, country- and industry-specific shocks. We find a large and statistically significant link fo...

Cogley and Sargent provide us with a very useful tool for empirical macroeconomics: a Gibbs sampler for the estimation of VARs with drifting coefficients and volatilities. The authors apply the tool to a VAR with three variables-inflation, unemployment, and the nominal interest rate-and two lags. This tool is a serious competitor to the identified-...

An empirical regularity in the portfolio diversification literature is the importance of country effects in explaining international return variation. We develop a new decomposition that disaggregates these country effects into region effects and within-region country effects. We find that half the return variation typically attributed to country e...

During the past two decades, dynamic stochastic general equilibrium (DSGE) models have taken center stage in academic macroeconomics. Nonetheless, these models are still rarely used in policy-making and forecasting. ; This article describes the workings of the DSGE-VAR, a procedure that combines DSGE models and vector autoregressions (VARs). The pr...

Business cycles in different regions of the United States tend to synchronize. This study investigates the reasons behind this synchronization of business cycles and the consequent formation of a national business cycle. Trade between regions may not be strong enough for one region to "drive" business cycle fluctuations in another region. This stud...

A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore if this change is driven by global integr...

The degree of comovement across national stock markets has increased dramatically in recent years. This paper explores some of the causes behind this phenomenon. It constructs a new firm-level dataset that covers monthly stock market data and annual balance sheet and income statement information from 1985 to 2002 for about 10,000 companies in 42 de...

The paper applies a factor model to the study of risk sharing among U.S. states. The factor model makes it possible to disentangle movements in output and consumption due to national, regional, or state-specific business cycles from those due to measurement error. The results of the paper suggest that some findings of the previous literature which...

Banking crises have been a recurrent phenomenon in Latin America over the past few decades. Some have argued that the internationalization of the banking sector has ushered in a new era: what used to be systemic risk from the perspective of local banks with undiversified portfolios might no longer be systemic from the standpoint of large internatio...

We estimate a model with country- and industry-specific shocks that extends the dummy variable model used in the portfolio diversification literature by relaxing the restriction that all stocks with exposure to a given shock have the same exposure to that shock. We find that: i) This restriction is strongly rejected by the data. ii) Many industry b...

Policy and investment decisions are made with an eye toward future economic conditions, and an econometric model that can correctly forecast directional changes in the business cycle would be a boon to policymakers, the business community, and the general public. This article provides some evidence on econometric models' ability to predict these di...

Motivated by the dollarization debate in Mexico, we estimate an identified vector autoregression for the Mexican economy, using monthly data from 1976 to 1997, taking into account the changes in the monetary policy regime that occurred during this period. We find that (i) exogenous shocks to monetary policy have had no impact on output and prices;...

There is a large potential for improving individual risk management through new risk management contracts and associated newindex-settled derivatives. However, there are some difficult problems in designing contracts so that they will be used effectively. Individuals have idiosyncratic individual risks that can be hedged only at some real resource...

This paper proposes a parsimonious and model-consistent method for combining forecasts generated by structural micro-founded models and judgmental fore-casts. The goal is to produce forecasts that are model-based, and therefore disciplined by the rigor of the economic model, but that can also incorporate judgmental information. In our set-up, there...

The paper analyzes risk sharing across US States and across European countries. The empirical literature on this subject has failed to recognize that, as long as agents can borrow and lend, risk sharing should be measured with respect to shocks to the overall level of wealth, and not to current income. The contribution of this paper is to build an...