A. Lee Smith 
Academic Publications

Welcome Working Papers Academic Publications FRB-KC Publications CV


The Dynamic Effects of Forward Guidance Shocks (with Brent Bundick)
The Review of Economics and Statistics, Volume 102, December 2020, pp. 946-965.
FRB-KC Working Paper | Online Appendix | Data and Code Files (includes FG shock series) | Updated FG Shock Series


In this paper, Brent and I examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we estimate that forward guidance shocks which lower expected future policy rates lead to moderate increases in economic activity and inflation. We then show that a standard model of nominal price rigidity can quantiatively account for our empirical finndings. Our results suggest no disconnect between the empirical effects of forward guidance shocks around policy announcements and the predictions from a standard theoretical model.

The Optimal Monetary Instrument and the (Mis)Use of Causality Tests (with John W. Keating)
The Journal of Financial Stability, Volume 42, June 2019, pp. 90-99.
FRB-KC Working Paper


In this paper, John and I use a New-Keynesian model with multiple monetary assets to show that if the choice of instrument is based solely on its propensity to predict macroeconomic targets, a central bank may choose an inferior policy instrument. We compare a standard interest rate rule to constant money growth rules for three alternative monetary aggregates determined within our model. Next we study the ability of Granger Causality tests – in the context of data generated from our model – to correctly identify welfare improving instruments. All of the policy instruments considered, except for Divisia, Granger Cause both output and prices at extremely high levels of significance. Divisia fails to Granger Cause prices despite the Divisia rule stabilizing inflation better than these alternative policy instruments. The causality results are robust to using a popular version of the Sims Causality test for which we show standard asymptotics remain valid when the variables are integrated, as in our case. 

A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions (with John W. Keating, Logan J. Kelly, and Victor J. Valcarcel)
Journal of Money, Credit, and Banking, Volume 51, February 2019, pp. 227-259.
FRB-KC Working Paper | Online Appendix | Data and Code Files


In this paper, John, Logan, Vic, and I develop an approach to identify the effects of monetary policy shocks which can be employed in samples that include the recent zero lower bound episode. The use of both conventional and unconventional policy measures after 2008 precludes using the effective federal funds rate. Therefore we employ a newly created broad monetary aggregate to elicit the effects of monetary policy shocks both prior to and after 2008. Our model produces plausible responses to monetary policy shocks free from price, output, and liquidity puzzles that plague other approaches. It also produces a series of monetary policy shocks which aligns well with major changes in the Fed’s asset purchase programs.

When Does the Cost Channel Pose a Challenge to Inflation Targeting Central Banks
European Economic Review, Volume 89, October 2016, pp. 471-494.
FRB-KC Working Paper | Data and Code Files


In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank’s inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. In this paper, I show that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules frequently result in indeterminacy, even if the central bank also targets output. Adding a nominal growth target to the policy rule can often alleviate this indeterminacy and therefore anchor inflation expectations.