Published in Economics Letters, Vol. 214, May 2022
I introduce a finite-difference solution method based on the envelope condition in continuous-time stochastic dynamic programming problems. The envelope method is easier to code and, in the presence of occasionally binding constraints, faster and more stable than popular methods based on the Hamilton-Jacobi-Bellman equation. As an illustration, I solve a stochastic growth model with irreversible investment. (Published version; Preprint.)
The "price puzzle''—a short-run increase in prices in response to higher interest rates—is a common feature of estimated responses to monetary policy shocks. In this paper, I show that it is also a robust prediction of the New Keynesian model: nearly all equilibria consistent with common identifying assumptions and estimates of interest rate responses result in a price puzzle. Although these results imply that exogenously higher interest rates can increase inflation in the short run, the model nevertheless always recommends raising rates endogenously to lower inflation after non-monetary shocks. This result calls into question the practice of inferring causal effects of endogenous policy changes from responses to exogenous policy shocks.
Since the late 1960s, the share of U.S. employment in occupations involving primarily routine tasks has declined by about 30 percent, a trend that has largely affected workers with a high-school degree but no college. This paper argues that contractionary monetary policy has accelerated this change. In part by disproportionately affecting industries with high shares of routine occupations, contractionary monetary policy shocks lead to large and very persistent shifts away from routine employment. Expansionary shocks, on the other hand, have little effect on these industries. Indeed, monetary policy's effect on overall employment is concentrated in routine jobs. These results highlight monetary policy's role in generating fluctuations not only in the level of employment, but also the composition of employment across occupations and industries.
This paper introduces new direct measures of uncertainty derived from the Michigan Survey of Consumers. The series underlying these new measures are more strongly correlated with economic activity than many others that are the basis for uncertainty proxies. The survey also facilitates comparison of these measures with response dispersion or disagreement, other commonly used proxies for uncertainty. Dispersion measures have low correlation with the direct measures and often have causal effects of opposite sign, suggesting that they are poor proxies for uncertainty. For the measures based on series most closely correlated with economic activity, positive uncertainty shocks are mildly expansionary.
This paper examines how monetary policy shocks in the U.S. affect the flows of workers among three labor market categories—employment, unemployment, and nonparticipation—and assesses each flow's relative importance to changes in labor market “stock” variables like the unemployment rate. The full stock-flow accounting reveals that job loss is the largest driver of monetary policy's effects on the labor market and that these fluctuations in job losses generate a composition effect in the stock of unemployed that plays a quantitatively important role in accounting for the dynamics of labor market variables after monetary policy shocks. I develop a New Keynesian model that incorporates these channels and show how a central bank can achieve welfare gains from targeting job loss, rather than output, in an otherwise standard Taylor rule.