Is the Fed Behind the Curve? (in progress).
Jan 2024 - Present
This is an independent research, supervised by Associate Professor Wenbin Wu at Fudan University.
This paper is honored as an excellent paper (2nd among all, undergraduate group) at the 7th Prospective Economist Forum, Beijing.
Abstract: The causes of the sustained high inflation in the U.S. since 2021 are widely debated. The Federal Reserve has gradually raised inter- est rates to nearly 20-year highs after COVID-19. However, it re- mains uncertain if the Fed has accurately predicted and effectively controlled inflation. By incorporating the dynamic effect, I employ a Bayesian VAR and a sufficient statistics method to quantitatively analyze the extent of lag in the Federal Reserve’s monetary policy and to determine whether there have been deviations between real- ity and predictions. I show that creating policy counterfactual path is possible with only two statistics: (i) the forecast paths of policy objectives, and (ii) the policy objectives to policy shocks. I utilize multiple forecast data to measure the counterfactuals of the opti- mal policy. In conclusion, I find that about 12% of the inflation gap could be attributed to Fed policy bias, whereas inaccuracies in the Fed’s forecasts account for approximately 7% of the inflation gap.