Using Wage Growth to Reform Federal Reserve Forward Guidance

Summary

This study assesses whether wage growth and the employment-to-population ratio could improve the Federal Reserve’s state-based forward guidance under the Evans Rule. It identifies limitations in using unemployment and inflation rates as policy thresholds, including potential bias and measurement error. The analysis uses time-series methods to calibrate alternative thresholds and examines how other labor utilization measures relate to them.

The study then applies shocks in FRB/US simulations and compares the resulting paths of eight macroeconomic variables across three scenarios. Its reported finding is that a wage-growth threshold would lead to an earlier federal funds rate lift-off than the current Evans Rule. The document does not provide the threshold values, shock specifications, or detailed simulation results, so it offers a high-level comparison rather than enough information to assess the calibration or reproduce the analysis.

Key ideas

• The study examines alternatives to unemployment and inflation thresholds in the Evans Rule.
• It uses time-series analysis to calibrate wage-growth and employment-to-population thresholds.
• FRB/US simulations compare macroeconomic responses across three policy scenarios.
• The wage-growth scenario produces an earlier federal funds rate lift-off in the reported simulations.
• The document does not provide detailed calibration or simulation specifications.

Tags

# Reforming the State-Based Forward Guidance through Wage Growth Rate Threshold: Evidence from FRB/US Simulations


# Reforming the State-Based Forward Guidance through Wage Growth Rate Threshold: Evidence from FRB/US Simulations









I have analyzed the practicality of the Evans Rule in the state based forward guidance and possible ways to reform it. I examined the biases, measurement errors, and other limitations extant in the unemployment and the inflation rate in the Evans Rule. Using time series analysis, I calibrated the thresholds of ECI wage growth and the employment to population ratio and investigated the relationship between other labor utilization variables. Then I imposed various shocks and constructed impulse response functions to contrast the paths of eight macroeconomic variables under three scenarios. The results suggest that under the wage growth rate scenario, the federal funds rate lift off earlier than under the current Evans Rule.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.