This paper examines the performance and robustness of simple monetary policy rules in models with learning agents subject to: (1) permanent or occasionally non-Ricardian fiscal policy; and/or (2) the presence of long-term government debt. My analysis indicates that the "global" response of the fiscal policymaker to debt determines the optimal monetary policy response. When fiscal policy is globally passive or globally active the optimal monetary policy rule typically features time-invariant coefficients with high inflation reaction coefficients in globally passive models and interest rate pegs in globally active models. In cases where fiscal policy features balanced or strong switching between active and fiscal policy stances, the optimal monetary policy rule features switching coefficients. These results extend to models with adaptive learning, including a hidden Markov model of learning never seen before in the literature.
This paper addresses the relationship between determinacy and E-stability in an abstract class of Markov-switching DSGE models with lagged endogenous variables. In this very general setting, we prove that a set of determinacy conditions from Cho (2016) and Cho (2018) imply the E-stability of the unique solution when agents condition their expectations on contemporaneous variables and use one-step-ahead decision rules. By considering a general class of models with lagged endogenous variables, this paper extends McCallum (2007) to a wide range of useful DSGE models that feature time-variation in model coefficients.
The Power of Forward Guidance and the Fiscal Theory of the Price Level (under revision; new draft coming March, 2019)
New Keynesian models predict implausible responses to anticipated structural changes, a phenomenon known as the Forward Guidance Puzzle. We develop and use tractable necessary and sufficient conditions for when a model exhibits a Forward Guidance Puzzle to formally study when active fiscal policy eliminates any Forward Guidance Puzzle. We show that permanent or recurring active fiscal policy can severely dampen equilibrium responses to forward anticipated structural changes. Moreover, uncertainty about future fiscal policy by itself may severely dampen equilibrium responses to forward guidance when fiscal policy is passive or active.
Maturity, Determinacy and Policy Regimes (under revision)
This paper explores some determinacy properties of a New Keynesian model with recurring fiscal and monetary policy regimes. We find that the maturity structure of government debt matters for determinacy and the existence of stable equilibria in the switching model, which is not true in standard monetary models with fixed policy regimes. In particular, central banks can typically embrace more overall active monetary policy stances in models with recurring active fiscal policy regimes when the maturity structure of debt held by households is longer. We argue that this gives central banks an incentive to twist the maturity structure of debt in order to choose interest rate rules that more effectively stabilize inflation.
Works in Progress
Does my model predict a forward guidance puzzle? (with Christopher G. Gibbs)
Heterogenous Learning and the Value of Intergenerational Knowledge Transfers (with Tristan Nighswander)
Expectational Stability and Interest Rate Pegs (coming soon)
Adaptive Learning in Hidden Markov Models