(July 2018, with Lance J. Bachmeier) Hamilton (1996, 2003, 2011) asserts in his "net oil price increase" (NOPI) model that a rise in oil prices generates a larger decline in output when the oil price hits a near-term high relative to its recent history. This paper develops a New Keynesian model with energy and a downward nominal wage rigidity that generates results consistent with the stylized facts of the NOPI model. Specifically, we show a large energy price increase pushes down the real wage enough that the downward nominal wage constraint binds for several periods, which causes firms to further reduce their output. Since that mechanism is unimportant when energy prices fall, the downward nominal wage constraint causes output to react asymmetrically to oil price shocks. We demonstrate how output's asymmetric response depends on the labor supply elasticity, the amount of price stickiness, the steady-state inflation rate, and the degree of downward nominal wage rigidity.

“The Zero Lower Bound and the Dual Mandate

(Revised May 2012, with William T. Gavin.) This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule. A policy rule, such as the one proposed by Taylor (1993) which is based on the dual mandate is highly likely to lead to episodes of zero short-term interest rates if the central bank is not committed to its inflation target. Our results on nominal interest rate and inflation dynamics do not depend on the particular mechanism that makes monetary policy have real effects. The key and necessary assumption is that expectations are forward looking. The bottom line in models in which monetary policy can influence the real economy is that a central bank must be committed to a long-run average-inflation objective if it wishes to achieve a dual mandate while avoiding the zero lower bound.

(Revised August 2017, this paper is forthcoming in the

(Revised April 2017, this paper is published in

(Revised June 2014, this paper is published in

(Revised March 2015, this paper is published in the

(Revised June 2012, this paper is published in

(Published in the Federal Reserve Bank of St. Louis

(Revised March 2010, this paper is published in the Southern Economic Journal, 2011, 77(4), 973-990, with Michael R. Pakko.) In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that the standard

**“The Signal Extraction Problem Revisited:
A Note on Its Impact on a Model of Monetary Policy”**

(Revised March 2009, this paper is published in Macroeconomic Dynamics, 2010, 14(4),
405-426.) 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), 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),
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), 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, this is an extended version of our
paper published in Applied Economics
Letters, 14(11), 789-793, with Yongsheng Wang.) 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”**

(Published in the Federal Reserve Bank of St. Louis* Review*,
September/October 2005, 87(5), 633-658, with William T. Gavin and
Michael R. Pakko.) 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),
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, published
in the *Journal of Monetary Economics*, 2000, 46(2), 345-383,
with John B. Carlson, Dennis L. Hoffman, and Robert H. Rasche.) 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?”**

(Published in the Federal Reserve Bank of Cleveland *Economic
Review*, 1996 Quarter 2, 15-23, with John B. Carlson.) 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?”**

(Published in the Federal Reserve Bank of Cleveland *Economic
Commentary*, April 15, 1996, with John B. Carlson.) 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?”**

(Published in the Federal Reserve Bank of Cleveland *Economic
Commentary*, December 1995, with John B. Carlson.) 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.