Uncertainty About the Persistence of Inflation

This paper offers several contributions to actual research and discussion on monetary policy. It clarifies the relationship between uncertainty of inflation persistence and optimal monetary policy and discusses the consequences of the recent Blanchard proposal to implement a higher inflation target in the light of parameter uncertainty. Furthermore, it provides insights of general interest on the methodological level by analyzing the interrelations between normalization of variables and their independence properties and by extending standard solution methods of dynamic programming problems to non-orthogonal parameter uncertainty

Artificial Intelligence in Swedish Policies::Values, benefits, considerations and risks

Part 4: AI, Data Analytics and Automated Decision MakingInternational audienceArtificial intelligence (AI) is said to be the next big phase in digitalization. There is a global ongoing race to develop, implement and make use of AI in both the private and public sector. The many responsibilities of governments in this race are complicated and cut across a number of areas. Therefore, it is important that the use of AI supports these diverse aspects of governmental commitments and values. The aim of this paper is to analyze how AI is portrayed in Swedish policy documents and what values are attributed to the use of AI. We analyze Swedish policy documents and map benefits, considerations and risks with AI into different value ideals, based on an established e-government value framework. We conclude that there is a discrepancy in the policy level discourse on the use of AI between different value ideals. Our findings show that AI is strongly associated with improving efficiency and service quality in line with previous e-government policy studies. Interestingly, few benefits are highlighted concerning engagement of citizens in policy making. A more nuanced view on AI is needed for creating realistic expectations on how this technology can benefit society

Expectation and Duration at the Effective Lower Bound

I study unconventional monetary policy in a structural model of risk-averse arbitrage, augmented with an effective lower bound (ELB) on nominal rates. The model exposes nonlinear interactions among short-rate expectations, bond supply, and term premia that are absent from models that ignore the ELB, and these features help it replicate the recent behavior of long-term yields, including event-study evidence on the responses to unconventional policy. When the model is calibrated to long-run moments of the yield curve and subjected to shocks approximating the size of the Federal Reserve.s forward guidance and asset purchases, it implies that those policies worked primarily by changing the anticipated path of short-term interest rates, not by lowering investors.exposures to interest-rate risk. However, the effects of short-rate expectations were more attenuated than the effects of bond-supply shocks during the ELB period

Central Bank Transparency under Model Uncertainty

This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the correct model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policie

A Portfolio-Balance Approach to the Nominal Term Structure

Explanations of why changes in the relative quantities of safe debt seem to affect asset prices often appeal informally to a portfolio balance mechanism. I show how this type of effect can be incorporated in a general class of structural, arbitrage-free asset-pricing models using a numerical solution method that allows for a wide range of nonlinearities. I consider some applications in which the Treasury market is isolated, investors have mean-variance preferences, and the short-rate process is truncated at zero. Despite its simplicity, a version of this model incorporating inflation can fit longer-term yields well, and it suggests that fluctuations in Treasury supply explain a sizeable fraction of the historical time-series variation in term premia. Nonetheless, under plausible parameterizations central-bank asset purchases have a fairly small impact on the yield curve by removing duration from the market, and these effects are particularly weak when interest rates are close to their zero lower bound

The Impact of ECB Communication on Financial Market Expectations

This paper analyzes European financial markets' comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB's introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB's interpretation and forecasts of price developments represent important news to financial market agents

Pricing TIPS and Treasuries with Linear Regressions

We present an affine term structure model for the joint pricing of Treasury Inflation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS' relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specification with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected inflation provides a better prediction of actual inflation than breakeven inflation. The value of the deflation floor calculated from the model is generally small in magnitude, but spiked during the recent crisis