Monetary Policy and Stock Market Boom-Bust Cycles by L. Christiano, C. Ilut, R. Motto, and M. Rostagno

Transcription

1 Comments on Monetary Policy and Stock Market Boom-Bust Cycles by L. Christiano, C. Ilut, R. Motto, and M. Rostagno Andrew Levin Federal Reserve Board May 8 The views expressed are solely the responsibility of the discussant, and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

2 Overview Objective What explains the dynamic effects of anticipated pickup in future productivity that turns out to have been overoptimistic? Methodology Highlight three U.S. stock market boom-bust episodes Formulate DSGE model that can generate a boom-bust cycle Perform sensitivity analysis with respect to alternative model specifications (including credit channel, structure of labor markets)

3 Outline of Comments DSGE Model Specification and Optimal Monetary Policy Strategic Complementarities in Firms Price-Setting Behavior Risk-Sensitive Household Preferences Reconsidering the Three U.S. Boom-Bust Episodes Central Bank Tools for Monitoring the Impact of News The Near-Term Macro Outlook Near-term Policy Expectations The Longer-Term Outlook

4 Model Specification and Optimal Monetary Policy Macroeconometric Equivalence DSGE models with distinct microeconomic foundations may be difficult or impossible to distinguish solely from the first-order approximation of equilibrium conditions for the aggregate economy (e.g. Sargent 976; Sims 998). Microeconomic Dissonance Distinct micro specifications of preferences, technology, and information can have crucially different implications for optimal policy and welfare (cf. Levin, Lopez-Salido, and Yun 6; Levin, Lopez-Salido, Nelson, and Yun 7).

5 Phillips Curve Slope: Macroeconometric Equivalence Alternative mechanisms may influence the sensitivity of a firm s price with respect to its marginal cost: - Factor Specificity (Woodford 3; ACEL 5) - Non-Constant Elasticity of Demand (Kimball 995) Both models generate the same New Keynesian Phillips curve: π = βe π + κ γ mc t t t+ p t γ = Factor Specificity Quasi-Kinked Demand + ε ( α ) α f f γ = μψ

6 Phillips Curve Slope: Microeconomic Dissonance Welfare L t = λπ πt + λxxt Firm-Specific Factors Quasi-Kinked Demand λ π = ε κ γ p λ π = ε κ p Thus, with /γ, the costs of inflation variability differ by an order of magnitude under these two specifications.

7 Slope of IS Curve: Macroeconometric Equivalence Many studies have analyzed Epstein-Zin preferences (Tallarini, ) β Ut = Vt + log( Etexp[ σut+ ]) σ V = logc + ϕ log( N ) t t t This specification generates the same IS equation as in the prototypical NK model with expected utility: y = Ey ρ [ r Eπ ], where ρ = t t t+ t t t+

8 Slope of IS Curve: Microeconomic Dissonance Optimal Policy Responses to Technology Shocks Output Epstein Zin Expected Utility Horizon

9 Slope of IS Curve: Microeconomic Dissonance. Optimal Policy Responses to Technology Shocks Inflation Epstein Zin Expected Utility Horizon

10 Reconsidering the Three Boom-Bust Episodes Was the boom induced by an anticipated pickup in future productivitivity growth? Was the bust induced by a subsequent downward revision in anticipated future productivity growth? Did monetary policy contribute to the boom-bust cycle by focusing too much on the stability of price inflation?

11 The U.S. Boom-Bust Episode of Industrial Production (left scale) GDP Deflator (right scale)

12 The Evolution of the S&P5 Stock Index, Logarithm...8 Real S&P5 Trend (Christiano-Fitzgerald)

13 The Evolution of U.S. Long-Run Inflation Expectations Implied by Nominal Forward Rates Michigan (5-to- Years Ahead) Hoey (-Year Avg.) ASA/NBER SPF (-Year Avg.) Levin and Taylor (8), Stop-Start Monetary Policies and the Great Inflation

14 Evolution of the Implicit Inflation Objective, Real Funds Rate Rule: π* = 5 Rule: π* = Rule: π* = Levin and Taylor (8), Stop-Start Monetary Policies and the Great Inflation

15 The Recent Evolution of Long-Run Growth Projections Percent Consensus Economics surveys of projected U.S. GDP growth 6-to--years ahead

16 FRB/US Model-Based Assessments of Potential Growth August 3 August 4 August 5 August R. Tetlow (6) Real-Time Model Uncertainty in the United States

17 Figure 6: Cross-Sectional Distribution of the External Finance Premium 5 Percentage Points th Percentile 5th Percentile 5th Percentile Notes: Each line denotes the specified sales-weighted percentile for the modelimplied external finance premium constructed using our benchmark estimates of the bankruptcy cost parameter µ t.

18 Figure 5: Bankruptcy Cost Parameter Estimates Notes: The solid line denotes the time-specific estimate of the bankruptcy cost parameter µ t. The shaded region represents the 95 percent confidence interval, computed using White s (98) heteroscedasticity-consistent asymptotic covariance matrix.

19 Probability The Recent Evolution of Expectations for U.S. GDP Growth in 8 July 7 Oct 7 Jan 8 April 8 < % to % to % to 3% 3 to 4% > 4% Source: Philadelphia Fed Survey of Professional Forecasters

20 The Impact of News on Near-Term Policy Expectations

21 The Impact of News on the Longer-Term Outlook One-Year Treasury Rate Ten-Year-Ahead Forward Rates Real Rate Breakeven Inflation Capacity Utilization Consumer Confidence Retail Sales Nonfarm Payrolls ISM Manuf. Survey Core CPI Real GDP.5.5. Initial Jobless Claims New Home Sales Regression t-statistics from Table of Gurkaynak, Levin, and Swanson (7), Does Inflation Targeting Anchor Long-Run Inflation Expectations?

22 Figure 3: Standard deviation of survey respondents point inflation forecasts United States and Euro Area Standard deviations.8 Standard deviation of -year ahead core CPI estimates from FRB SPF.7 Standard deviation of 5-year ahead HICP estimates from ECB SPF Standard deviations

23 Figure 6: Selected response coefficients of forward U.S. inflation compensation, basis pointsus Non-farm Payrolls 6 6 basis points US GDP Advance Forward-rate horizon Forward-rate horizon Note: The solid lines are estimated coefficients and the dashed lines ± standard error bands for regressions of one-year forward rates of U.S. inflation compensation ending two- to ten-years ahead. All regressions estimated from June, 3 to December 3, 6.maturity.

24 Figure 5: Selected response coefficients of forward euro-area inflation compensation basis points US Non-Farm Payrolls basis points French CPI Forward-rate horizon Forward-rate horizon basis points IFO Business Survey basis points ZEW Business Survey Forward-rate horizon Forward-rate horizon Note: Solid lines are estimated coefficients and dashed lines are ± standard error bands for regressions of one-year forward rates of euro-area inflation compensation ending two- to tenyears ahead. All regressions estimated June, 3 to December 3, 6.