“The Signal Extraction Problem Revisited: A Note on its Impact on a Model of Monetary Policy”
(Revised March 2009, this paper is forthcoming in Macroeconomic Dynamics) This paper develops a dynamic stochastic general equilibrium (DSGE) model with sticky prices and sticky wages, where agents have imperfect information on the stance and direction of monetary policy. Agents respond by using Kalman filtering to unravel persistent and temporary monetary policy changes in order to form optimal forecasts of future policy actions. Our results show that a New Keynesian model with imperfect information can account for several key effects of an expansionary monetary policy shock: the hump-shaped increase in output, the delayed and gradual rise in inflation, and the fall in the nominal interest rate.

“Output, Inflation, and Interest Rates in an Estimated Optimizing Model of Monetary Policy”
(Revised November 2006, this is an extended version of my paper published in the Review of Economic Dynamics, 2009, 12(2), pp. 327-343.) This paper examines the impact of sticky price and limited participation frictions, both separately and combined, in a dynamic stochastic general equilibrium model. Using U.S. data on output, inflation, interest rates, money growth, consumption, and investment, likelihood ratio tests and Bayesian pseudo-odds measures reveal that the data prefers a model with both structural features. Our results also show that the combined model mimics many important features of the business cycle. In particular, the model generates plausible impulse responses, and monetary policy shocks are responsible for only a modest amount of output, inflation, and nominal interest rate movements.

“Inflation Risk and Optimal Monetary Policy”
(Revised December 2007, this paper is published in Macroeconomic Dynamics, 2009, 13(s1), pp. 58-75, with William T. Gavin and Michael R. Pakko) This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy rules are modified to include some weight on a price path, the economy achieves equilibria with substantially lower long-run inflation risk. With either sticky prices or sticky wages, a price path target reduces the variance of inflation by an order of magnitude more than it increases the variability of the output gap.

“Sticky Price and Sticky Information Price Setting Models: What is the Difference?”
(Revised June 2006, this version of my paper is published in Economic Inquiry, 2007, 45(4), pp. 770-786.) Using a partial equilibrium framework, Mankiw and Reis [2002] show that a sticky information model can generate a lagged and gradual inflation response after a monetary policy shock, whereas a sticky price model cannot. Our paper demonstrates that that finding is sensitive to their model's parameterization. To determine a plausible parameterization, we specify a general equilibrium model with sticky information. In that model, we find that inflation peaks only one period after a monetary disturbance. A sensitivity analysis of our results reveals that the inflation peak is delayed by including real rigidities when the monetary policy instrument is money growth, whereas inflation peaks immediately when the policy instrument is the nominal interest rate.

“What is a Realistic Value for Price Adjustment Costs in New Keynesian Models?”
(Revised December 2005, with Yongsheng Wang, this is an extended version of our paper published in Applied Economics Letters, 14(11) pp. 789-793.) Rotemberg's [1982] price adjustment costs framework is a popular sticky price specification; yet, the data provides little information on the magnitude of those costs. This paper finds a plausible range of parameterizations for those price adjustment costs. Our results show that the specific size of the price adjustment costs depends on the average markup of price over real marginal cost and the average time firms wait to reoptimize their price. In particular, the price adjustment costs are higher when the average markup is lower and the mean time between price reoptimizations is longer.

“The Monetary Instrument Matters”
(with William T. Gavin and Michael R. Pakko, published in the Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5) pp. 633-658.)  This paper revisits the issue of money growth versus the interest rate as the instrument of monetary policy.  Using a dynamic stochastic general equilibrium framework, the authors examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables.  They show that inflation persistence and the variability of inflation relative to the money growth depend on whether the central bank follows a money growth rule or an interest rate rule.  With a money growth rule, inflation is not persistent and the price level is much more volatile than the money supply.  Those counterfactual implications are eliminated by the use of interest rate rules whether prices are sticky or not.  A central bank’s utilization of interest rate rules, however, obscures the information content of monetary aggregates and also leads to subtle problems for econometricians trying to estimate money demand functions or to identify shocks to the trend and cycle components of the money stock.

“In Search of the Liquidity Effect in a Modern Monetary Model”
(Revised April 2001, this is an earlier version of my paper published in the Journal of Monetary Economics, 2004, 51(7), pp. 1467-1494.) This paper examines the impact of a monetary policy shock in a dynamic stochastic general equilibrium model with sticky prices and financial market frictions. First, we examine the shortcomings of monetary models emphasizing these frictions individually. The model then is specified to limit the response of prices and savings to a current period monetary disturbance. Our results show that this model can account for the following key responses to an expansionary monetary policy shock: a fall in the nominal interest rate; a rise in output, consumption, and investment; and a gradual increase in the price level. Finally, a detailed sensitivity analysis shows the model's results depend on the parameters assigned to critical structural features. Technical Appendix

“Results of a Study of Stability of Cointegrating Relations Comprised of Broad Monetary Aggregates”
(Federal Reserve Bank of Cleveland Working Paper #99-17, with John B. Carlson, Dennis L. Hoffman, and Robert H. Rasche, published in the Journal of Monetary Economics, 2000, 46(2), pp. 345-383.) We find strong evidence of a stable "money demand" relationship for MZM and M2M through the 1990s. Though the M2 relation breaks down somewhere around 1990, evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in M2 velocity, which began around 1990 and was largely over by 1994. Taken together, our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds. Although this reallocation may have been induced by depository restructuring, we argue that the substitution could be explained by appropriately measured opportunity cost.

“MZM: A Monetary Aggregate for the 1990s?”
(with John B. Carlson, published in the Federal Reserve Bank of Cleveland Economic Review, 1996 Quarter 2, pp. 15-23.) Deregulation and financial innovation have wreaked havoc on the relationship of traditionally defined money measures with economic activity and interest rates. In this article, the authors present some tentative evidence that an alternative measure of money, MZM, has endured these events reasonably well. MZM is broader than M1 but essentially narrower than M2, comprising all instruments payable at par on demand. Since 1974, MZM has exhibited a fairly stable relationship with nominal GDP and with its own opportunity cost, suggesting that the aggregate has a potential role for policy.

“Where is All the Currency Hiding?”
(with John B. Carlson, published in the Federal Reserve Bank of Cleveland Economic Commentary, April 15, 1996.) An examination of the U.S. dollar’s growing popularity abroad and a discussion of the implications of rising currency demand for U.S. economic policy.

“M2 Growth in 1995: A Return to Normalcy?”
(with John B. Carlson, published in the Federal Reserve Bank of Cleveland Economic Commentary, December 1995.) In recent years, M2 growth has been unusually weak. This aberrant behavior led to its demise as the primary indicator of monetary policy. Although the aggregate has been behaving more normally over the past year or so, it seems unlikely that it will soon regain its earlier stature as a key policy guide.