(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 June 2016, with Evan F. Koenig) This paper analyzes various combinations of nominal price and wage frictions to determine which specifications best fit post-war U.S. data. We construct dynamic stochastic general equilibrium (DSGE) models that incorporate those frictions and use Bayesian methods to estimate each model's parameters. Since inflation was unanchored during the 1970s, we divide the data into three distinct periods: the early sample (from the mid-1950s through the 1960s), the middle sample (during the 1970s), and the late sample (from 1983 through 2007). Our estimates indicate that price and wage contracting arrangements have changed over time. Prices are re-optimized more often and exhibit a higher degree of indexation to past inflation in the middle sample than in the other two samples. In contrast, wages are re-optimized more frequently and display less evidence of indexation as time progresses. Our empirical results also suggest that both smaller and less-frequent technology shocks and improved monetary policy contributed to the reduced volatility in output observed during the "Great Moderation" period.

(Revised April 2017, this paper is forthcoming 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.