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

TL;DR

This paper evaluates and proposes reforms to the Evans Rule for forward guidance by analyzing wage growth thresholds and their impact on monetary policy using FRB/US simulations.

Contribution

It introduces a reform of the Evans Rule based on wage growth rate thresholds and assesses its effects through detailed simulation analysis.

Findings

Wage growth rate thresholds can lead to earlier federal funds rate lift-off.

Reformed thresholds improve the accuracy of policy timing.

Simulation results show different macroeconomic paths under the new guidance.

Abstract

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.