Home Page of Carl E. Walsh

Carl Walsh
Distinguished Professor of Economics Emeritus
Department of Economics
University of California, Santa Cruz
Santa Cruz, CA 95064

Former Honorary Advisor, Institute for Monetary and Economic Studies, Bank of Japan 2019-2022
International Research Fellow, Kiel Institute

Office hours, Zoom meetings by appointment.
Office location: 467 E2 (no in person meetings during 2022-2023)
Phone: (831) 332-0256
email: walshc@ucsc.edu

Research Interests: Monetary policy, central banking: My research deals primarily with central banking and issues associated with the theory of monetary policy. Recent work has focused on the worker heterogeneity and the effects of monetary policy and instrument choice in new Keynesian models.

New: My blog: Thoughts on Fed policy: occasional musing on issues relevant to monetary policy and other topics.

My vita contains a complete list of my publications.
My Google scholar page

The fourth edition of Monetary Theory and Policy, MIT Press 2017. Among the major changes in the 4th edition are the addition of a new chapter on the effective lower bound on nominal interest rates and balance sheet policies, discussion of search and matching models of unemployment in Chapter 8 on the new Keynesian model, and an extensive revision of Chapter 9 on the open economy.

Working papers and selected recent publications
Recent working papers and publications: To view downloadable pdf versions, click on the titles.
Policy notes:

Sept 1, 2022: The Fed Pivots: Goodbye Soft Landing – Hello Disinflation Some thoughts on the recent Jackson Hole Symposium. In this brief note, I relate Federal Reserve Chair Powell's Jackson Hole speech to the policy shift in 1979 under Paul Volcker and to the attitude towards inflation of Volcker's predecessor G. William Miller in 1978. At this year’s Jackson Hole Symposium, Powell firmly took on the mantle of Volcker, emphasizing that it is the Fed’s responsibility to ensure low average inflation. It remains to be seen which former Chairman’s legacy will guide policy over the next year.

Working papers:
Newly revised February 2023: Seemingly irresponsible but welfare improving fiscal policy at the lower bound, joint with Roberto Billi. Abstract: We evaluate super-active fiscal policy rules that cut taxes or increase spending as the government's debt level rises. Using a standard New Keynesian model subject to an occasionally-binding zero lower bound on the monetary policy interest rate and a model-consistent measure of welfare, we show that such seemingly irresponsible fiscal rules can improve economic welfare. While sensible fiscal policy and active monetary policy performs best away from the ZLB, the fiscal rules we analyze significantly reduce the time spent at the ZLB and produce overall welfare gains. Super-active fiscal policies are most effective with a high debt target and when debt is short-term. However, when private expectations are characterized by cognitive discounting, the performance of super-active fiscal rules deteriorates. Fiscal rules calibrated to the U.S. response during both the Great Recession and COVID recession, combined with a weak monetary policy response to inflation, outperform a monetary policy that responds strongly to inflation and reduce the frequency of ZLB episodes under rational expectations, but not under cognitive discounting. Keywords: automatic stabilizers, cognitive discounting, fiscal and monetary interactions, government debt. JEL: E31, E52, E63.
Previous Feb. 2022 version: Riksbank workking paper WP410

A SUERF policy brief based on the above working paper: Is super-active fiscal policy desirable, No. 323, April 2022.

New: Inflation Surges and Monetary Policy. Keynote Address, May 2022. Bank of Japan IMES Monetary and Economic Studies, 2022, 40: 39-65. Abstract: Similarities between the 1960s and 1970s raise concerns that central banks are repeating mistakes that led to the Great Inflation. Two explanations for this earlier period of inflation, that it was due to shocks and special factors or that it was the result of political pressures on monetary policy, seem particularly relevant today. Major central banks such as the Federal Reserve and the ECB have been slow to react to the surge in inflation due to COVID-19 and the war in Ukraine. I investigate the consequences of policy delay and the impact of a more aggressive reaction, conditional on policy being delayed. In assessing the persistence of inflation shocks and in dealing with uncertainty about inflation dynamics, policymakers seem to be ignoring lessons from the literature on monetary policy in the face of model uncertainty. uncertainty.

Now available from the JMCB or via the pre-publication version: The role of money in monetary policy at the lower bound, joint with Roberto Billi and Ulf Soderstrom, (earlier versions: Sveriges Riksbank Working Paper Series No. 390, CEPR Discussion Paper 14865, June 2020). Abstract: In light of the current low-interest-rate environment, we reconsider the merits of strict money growth targeting (MGT) relative to conventional inflation targeting (IT) and to price level targeting (PLT). We evaluate these policies in terms of social welfare through the lens of a New Keynesian model and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate. Although MGT makes monetary policy vulnerable to money demand shocks, MGT contributes to achieving price level stationarity and significantly reduces the incidence and severity of the ZLB relative to both IT and PLT. Furthermore, MGT lessens the need for fiscal expansions to supplement monetary policy in fighting recessions.
The Challenges with Rules-Based Policy Implementation, prepared for the 2017 Annual Conference of the Federal Reserve Bank of Boston, Are Rules Made to be Broken? Discretion and Monetary Policy, October 13-14, 2017. Absrtract: I discuss challenges in implementing a rule-based monetary policy (RBP) regime. Many of the arguments for and against RBP are similar to ones prominent 20 years ago in debates over inflation targeting. I draw a distinction, common in the literature on inflation targeting, between a strict and a flexible RBP regime, highlighting the trade-offs involved in moving towards a stricter regime. Under flexible regimes, deviations from the reference rule are allowed, and I derive the rule for deviating from the rule. Stochastic, transitory fluctuations in non-rulable variables, such as the long-run equilibrium real interest rate, are shown to increase the volatility of expected future inflation around target under a level rule, while permanent shifts threaten credibility as either policymakers must act consistent with the rule or with achieving the inflation target. The best simple rule depends on policymakers' preferences, which may make it difficult for a policy committee to agree if the central bank is charged with picking the rule. Turning to practical issues, I discuss how a desire to promote transparency and accountability can help one in choosing between alternative rules.

April 2018 version: Simple sustainable forward guidance at the ELB. Abstract: Forward guidance plays an important role in models of monetary policy at the effective lower bound (ELB) for nominal interest rates. Yet in common frameworks used to study equilibrium at the ELB, forward guidance is not credible. In this paper, I ask whether policy makers lacking the ability to commit may, nevertheless, still make credible announcements about future policy. They can if there is a positive probability of hitting the ELB in the future. Nakata (2014) has shown that with even a small probability of future ELB episodes, the optimal Ramsey policy can be sustained. However, such policies are potentially difficult to communicate to the public. I examine the sustainability of simple promises, such as a promise to keep the nominal interest rate at zero for a fixed number of periods after the ELB episode ends. I show that such promises are sustainable, as long as the promise is not for too many periods. If the expected duration of ELB episodes is short and the expected duration away from the ELB is long, the length of forward guidance that minimizes the present value of losses at the ELB may not be sustainable.

Preliminary: How credible are inflation announcements at the ELB? Abstract: Cochrane (2015) has emphazied the multiplicity of equilibrium at the effective lower bound (ELB) on nominal interest rates, with the economy's behavior at the ELB dependent on the inflation rate the central bank promises to delivery when the ELB is exited. If the probability of reverting to the ELB in the future is zero, any such promise is not sustainable as, absent the ability to commit, optimal discretion dominates delivering on the promise once the ELB episode has ended. However, if the economy may return to the ELB in the future, I show that that are welfare improving inflation promises that are sustainable even in the absence of a commitment technology.

Both the above two papers (Simple sustainable forward guidance at the ELB and How credible are inflation announcements at the ELB?) originated with a keynote address presented at the Norges Bank Rethinking Inflation Targeting Conference, Oslo, Norway, September 8-9, 2016. The paper presented at the conference, Sustainable Forward Guidance, discussed both sustainable forward guidance and credible inflation announcements. Presentation slides

Revised July 2017: Workers, Capitalists, Wage Flexibility and Welfare. First draft (titled Workers, Capitalists, Wages and Employment) presented at the Richmond Fed-IfW Conference on The Labor Market after the Great Recession, Richmond, VA, Oct. 2-3, 2014. Appendix.

Labor markets and monetary policy:

Worker heterogeneity, selection, and unemployment dynamics in a pandemic, with Federico Ravenna. Journal of Money, Credit, and Banking,, available online Dec. 29, 2021. Abstract: We employ a new Keynesian model with random search in the labor market and endogenous selection among heterogeneous workers to investigate the impact of a pandemic-induced recession on the distribution of unemployment across workers. In such a recession, workers whose unemployment spells in normal times are inefficiently frequent and long are disproportionately affected. This remains true even when the pandemic initially causes mass layoffs that affect workers broadly or if many separations represent temporary layoffs. Monetary policy that responds to labor market variables affects unemployment for all workers but does relatively little for the distribution of unemployment across the workers. https://doi.org/10.1111/jmcb.12899. Appendix.

Slow recoveries, worker heterogeneity, and the zero lower bound, with Federico Ravenna, March 2014, version presented at the 8th Conference of the International Research Forum on Monetary Policy, Federal Reserve Board, March 21-22, 2014.

Screening and Labor Market Flows in a Model with Heterogeneous Workers, with Federico Ravenna, Journal of Money, Credit, and Banking, Dec. 2012, 44(s2):31-71.

Monetary Policy and Labor Market Frictions: a Tax Interpretation, with Federico Ravenna, Journal of Monetary Economics), March 2012, 59(2): 180-195.

Appendix (Previously titled The Welfare Consequences of Monetary Policy and the Role of the Labor Market: a Tax Interpretation). Now available at Science Direct.

Welfare-based optimal monetary policy with unemployment and sticky prices: A linear-quadratic framework with Federico Ravenna. AEJ Macroeconomics, April 2011, 3(2):130-162. Appendix.

Vacancies, Unemployment, and the Phillips Curve, (with Federico Ravenna), European Economic Review 52 (2008), 1494-1521 (published version)

Labor Market Search, Sticky Prices, and Interest Rate Policies, Review of Economic Dynamics 8(2005), 829-849.

Labor Market Search and Monetary Shocks, Aug. 2002. in Elements of Dynamic Macroeconomic Analysis, S. Altug, J. Chadha, and C. Nolan, editors, Cambridge University Press, 2003, 451-486. JEL: E52, E58. Appendix to Labor Market Search and Monetary Shocks.

Monetary policy and other topics:

Is super active fiscal policy desirable?, joint with Roberto Billi. SUERF Policy Brief No. 323, April 2022.

Alternatives to inflation targeting in low interest rate environments, Monetary and Economic Studies, 2019, 37: 41-69. Keynote at the 2019 Conference of the Bank of Japan's Institute for Monetary and Economics Studies, Tokyo May 2019. Abstract: The challenges of a low interest rate, low inflation environment have led to calls to re-examine the basic framework of flexible inflation targeting (IT). Interest in alternatives such as price-level targeting (PLT) and average inflation targeting (AIT) arises from the way in which these policy regimes cause inflation expectations to work as automatic stabilizers, a factor that can be of major importance if the central bank is constrained at the ELB. I show that the performance of PLT deteriorates significantly relative to IT and AIT in the presence of wage rigidities, shocks to productivity, and deviations from rational expectations. A central bank able to credibly commit to the optimal policy consistent with PLT is likely to face a much higher probability of needing balance sheet policies to implement policy than would be the case under IT or AIT. These results suggest it is too early to count IT out in the competition over policy design. (Also available as BOJ IMES Working Paper 19-E-13.)

Comments on Gerdrup, Hansen, Krogh and Maih, Leaning Against the Wind When Credit Bites Back, International Journal of Central Banking, 13(3), Sept. 2017, 321-336.

Goals and rules in central bank design, keynote address presented at the Reserve Bank of New Zealand and International Journal of Central Banking Conference Reflections of 25 Years of Inflation Targeting, Wellington, New Zealand, December 1-2, 2014. CESifo Working Paper 5293, April 2015, International Journal of Central Banking,, September 2015, 11(S1): 295-352. Also CESifo Working Paper 5293

Multiple objectives and central bank trade-offs under flexible inflation targeting, Keynote address, 16th Annual Inflation Targeting Seminar, Banco Central do Brazil, May 15-16, 2014. CESifo Working Paper 5097, November 2014.

Monetary policy transmission channels and policy instruments, prepared for "Monetary Policy and the Public," a Federal Reserve Bank of Cleveland Conference, May 29-30, 2014.

Monetary policy and resource mobility, Paper presented at the 200th Anniversery Conference of the Bank of Finland, Helinki, May 5-6, 2011. Appendix and Presentation slides.

The future of inflation targeting, Keynote address, Australia Conference of Economists, Sydney, Sept. 27, 2010, shortened version published in The Economic Record, Sept. 2011, 87: 23-36.
Central Bank Independence Revisited, Economic Papers, 30(1), March 2011, 18-22.

Panel discussion on Post-Crisis Monetary Policy Strategies, 8th Journees of the Foundation of the Banque de France, Paris, June 21, 2010.

Implementing Monetary Policy, prepared for the Bank of Korea International Conference, May 31-June 1, 2010. forthcoming, Seoul Journal of Economics24((4), Winter 2011.

Commentary: using models for monetary policy analysis,", IJCB Fall 2009 Monetary Policy Conference, Banque de France, Paris, Sept. 24-25, 2009, IJCB March 2010, 6(1).

Using monetary policy to stabilize economic activity. in Federal Reserve Bank of Kansas City Financial Stability and Macroeconomic Policy 2009 Jackson Hole Symposium, 2010: 245-296.

Inflation targeting: What have we learned? The John Kuszczak Memorial Lecture, prepared for "International Experience with the Conduct of Monetary Policy under Inflation Targeting," Bank of Canada, July 22-23, 2008. (Final version, revised January 2009. Published version: Inflation targeting: what have we learned" International Finance, 12:2, 2009, 195-233.

Announcements and the Role of Policy Guidance, prepared for The 32nd Annual Economic Policy Conference, Federal Reserve Bank of St. Louis, Review, July/August 2008, 421-442.

Optimal economic transparency, The International Journal of Central Banking, 3(1), March 2007, 5-36. (published version).

Transparency, flexibility, and inflation targeting, Prepared for the Ninth Annual Conference of the Central Bank of Chile, F. Mishkin and K. Schmidt-Hebbel (eds), "Monetary Policy under Inflation Targeting," Santiago, Chile, 2007, 227-263.

Communications and the Objectives of Monetary Policy. Talk delivered at the Second Summit Meeting of Central Banks on Inflation Targeting, hosted by the Banco Central de Chile, Santiago, Chile, Nov. 14, 2007.

Monetary Policy and Key Unobservables in the G-3 and Selected Inflation-Targeting Countries, with Klaus Schmidt-Hebbel. Prepared for the Eleventh Annual Conference of the Banco Central de Chile, Nov. 15-16, 2007.

Inflation Targeting and the Role of Real Objectives. Sept. 2007. This is the current version of a talk I have given at the Central Bank of Uruguay, conferences at Glasgow University and Cambridge University, and the Czech Economic Society and CERGE-EI.

Parameter misspecification and robust monetary policy rules. ECB Working Paper No. 477, April 2005.

The contribution of theory to practice in monetary policy: recent developments, Monetary Policy: A Journey from Theory to Practice: An ECB Colloquium held in honour of Prof. Otmar Issing, Frankfurt, 16-17 March 2006, 143-160.

Optimal Monetary Policy with the Cost Channel, (with Federico Ravenna), Journal of Monetary Economics, 53 (2006), 199-216. (earlier versions titled The Cost Channel in a New Keynesian Model: Evidence and Implications), Technical Appendix.

Central bank independence, New Palgrave Dictionary, December 2005.

Comment's on Levin, Onatski, Williams, and Williams, NBER Macroeconomic Annual 2005, M. Gertler and K. Rogoff (eds.), The MIT Press, 2XX-308.

Economic Structure and Monetary Policy Design, in Macroeconomic Implications of Postcrisis Structural Change, Lee-Jay Cho, Dongchul Cho, and Yoon Hyung Kim (eds.), Korean Development Institute, May 2005, 189-225.

Remarks prepared for the Seminar on Selected Experiences in Implementing the Code of Good Practices on Transparency in Monetary and Financial Policies, Monetary and Financial Systems Department, International Monetary Fund, Washington, D.C., Feb. 7, 2005.

Comments on "Conducting Monetary Policy at Very Low Short-Term Interest Rates," by Ben S. Bernanke and Vincent R. Reinhart, AEA Session, January 3, 2004.

Modern Central Banking: An Academic's Perspective, prepared for the 10th Anniversary of the introduction of the dram, Central Bank of Armenia, Nov. 23, 2003.

Endogenous Objectives and the evaluation of targeting rules for monetary policy, formerly titled Parameter misspecification with optimal targeting rules and endogenous objectives. Prepared for the Nov 19-20, 2004 Carnegie-Rochester Conference, Journal of Monetary Economics, 52 (2005), 889-911.

Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result, Journal of Money, Credit, and Banking 36(6), Dec. 2004, 1105-1113. Some extensions and generalizations are discussed in The equivalence of robustly optimal targeting rules and robust control targeting rules: an extension (May 2004).

Interest and Prices: A Review Essay, a review of Mike Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy, Macroeconomic Dynamics 9(2005), 462-468.

Implications of a changing economic structure for the strategy of monetary policy, in Monetary Policy and Uncertainty: Adapting to a Changing Economy, Jackson Hole Symposium, Federal Reserve Bank of Kansas City, 2003, 297-348.

Comment on: The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan by G. Coenen and V. Wieland, Carnegie-Rochester Conference Series, Journal of Monetary Economics, 50 (5), July 2003, 1103-1108. (also available online.)

Speed Limit Policies: The Output Gap and Optimal Monetary Policy. (a shorter version that now includes a comparison with price level targeting: July 2002, a shorter version appeared in the American Economic Review, 93(1), March 2003, 265-278.) Older version that contains the appendix and more complete derivations (rev. July 2002)

Accountability, Transparency, and Inflation Targeting Journal of Money, Credit, and Banking, 35(5), October 2003, pp. 829-849.)

Teaching Inflation Targeting: An Analysis for Intermediate Macro. Journal of Economic Education 33 (4), Fall 2002, 333-347.

When Should Central Bankers Be Fired? Economics of Governance 3 (1), 2002, 1-21.

Market Discipline and Monetary Policy, Oxford Economic Papers, 52 (2000), 249-271. Reply to de Carvelho and Bugarin, Oxford Economic Papers 57 (2005), 740-741.

Monetary Policy Trade-offs in the Open Economy, Nov. 1999.

Announcements, Inflation Targeting and Central Bank Incentives, Economica, 66 (1999), 255-269.

Central Bank Independence, Economic Behavior and Optimal Term Lengths (with Christopher J. Waller), American Economic Review, 86 (5), Dec. 1996, 1139-1153.

Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?, Journal of Money, Credit and Banking, 27 (4), Nov. 1995, Part 1, 1179-1191.

Optimal Contracts for Central Bankers, American Economic Review, 85 (1), March 1995, 150-167.

In Defense of Base Drift, American Economic Review, 1986, 76(4): 692-700.

Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements, Quarterly Journal of Economics, 100, 1985, 1011-1039, with V. Vance Roley.

Testing for Real Effects of Monetary Policy Regime Shifts, Journal of Money, Credit and Banking, 20 (3), August 1988, Pt. 1, 393-401.

Other publications:
Empirical Evidence on the Insulation Properties of Fixed and Flexible Exchange Rates: The Japanese Experience, Journal of International Economics, 1992, 32: 241-263, with Michael Hutchison.

Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits, Journal of Money, Credit and Banking, 23 (2), May 1991, 206-223, (with Bharat Trehan).

Seigniorage and Tax Smoothing in the United States: 1914 - 1986, Journal of Monetary Economics, 25 (1), Jan. 1990, 97-112, with Bharat Trehan.

Common Trends, the Government's Budget Constraint, and Revenue Smoothing, Journal of Economic Dynamics and Control, 12 (1988), 425-444, with Bharat Trehan.

A Rational Expectations Model of Term Premia with Some Implications for Empirical Asset Demand Equations, Journal of Finance, 40 (1), March 1985, 63-83.

Unanticipated Money and Interest Rates, American Economic Review Papers and Proceedings, 74 (2), May 1984, 49-54, with V. Vance Roley.

Saving in Primitive Economies, American Anthropologist, 1983, 85(3): 643-649.

Monetary Theory and Policy, 4th. ed., The MIT Press, 2017.
The fourth edition of this graduate level text on monetary theory and policy is available from MIT Press. Check out the MIT Press site to request an examination copy.
For links to the programs and other material related to the new edition, go to the web site for the fourth edition

Economics, with Joe Stiglitz, W. W. Norton, 2006, 4th ed. (Also available in separate micro and macro splits.) A modern treatment of economics for the introductory student. Exposes students to the basic competitive model, but deals also with the important role of imperfect information and imperfect competition. The macro approach replaces static aggregate demand and supply models of the price level, to which a Phillips curve is then appended, with an integrated framework for understanding inflation and output determination.
UCSC Economics Department Home Page

Carl E. Walsh / UCSC / walshc@ucsc.edu