Board of Governors of the Federal Reserve System

Abstract:

We apply various natural language processing tools to see if the Beige Book is helpful in understanding economic activity. The Beige Book is a gathering of anecdotal compilations of current economic conditions from each Federal Reserve Bank, which is released to the public prior to FOMC meetings. We find that even controlling for lagged GDP growth and other metrics, the Beige Book sentiment provides meaningful explanatory power in nowcasting GDP growth and forecasting recessions, even more so than the yield spread or other news sentiment measures. The results on economic activity even hold in regional panel analysis. The Beige Book offers many more insights on the economy that can be gathered from even simple keyword tabulations. Topic modeling can also inform us about the different factors driving the narrative across particular periods of interest.

Keywords: Beige Book, real economic activity, recessions, nowcasting and forecasting, FinBERT, machine learning, sentiment analysis, natural language processing

DOI: https://doi.org/10.17016/FEDS.2026.004

Abstract:

I study how fluctuations in business formation and destruction affect inflation and the transmission of monetary policy. To do this analysis, I extend a New Keynesian model to include endogenous business formation and destruction and heterogeneous producers. A decline in the number of producers puts upward pressure on inflation, and I find that this mechanism can explain about half of the missing deflation following the Great Recession. I then study the transmission of monetary policy in this framework. I show that endogenous fluctuations in entry generate an intertemporal trade-off in monetary policy; a contractionary shock leads employment and inflation to decline on impact, but inflation later overshoots, as the shock also causes a decline in entry and an increase in exit.

DOI: https://doi.org/10.17016/FEDS.2026.003

Abstract:

New money-like products, such as tokenized money market funds (MMFs), money market exchange-traded funds (MMETFs), and stablecoins, could be transformative for finance. These products may offer significant benefits, but like other money-like assets, they also have certain vulnerabilities. We introduce a framework to analyze the vulnerabilities of new products by comparing their features to those that contribute to vulnerabilities in MMFs. Specifically, we examine the extent to which each product engages in liquidity transformation, is subject to threshold effects, serves as a money-like asset, poses contagion risks, and has reactive investors. Our framework is useful for assessing the potential effects of novel cash-like products on the overall resilience of the financial system and how such an assessment may change as these products’ uses evolve.

Keywords: money market funds (MMFs), stablecoins, tokenized money market funds, money market exchange-traded funds (MMETFs), financial stability, liquidity transformation, private money-like assets, moneyness, contagion, reactive investors, thresholds

DOI: https://doi.org/10.17016/FEDS.2026.002

Abstract:

The 2021-2022 inflation episode presented the first opportunity to examine inflation and price dispersion using U.S. scanner data in a high-inflation environment. Data from 50,000 outlets reveals that price changes across similar goods grew more dispersed in 2022 before falling again in 2023. This paper documents how price change dispersion interacts with households' product choices to generate substantial inflation heterogeneity. Household-level inflation rates exhibit a 1.4 percentage point interquartile range in 2019, which grew to 4.0 percentage points in 2022 before falling back to 1.6 percentage points in 2023. Households offset little of their implied budget shocks through substitution. A model with idiosyncratic preferences rationalizes household behavior and implies that households' inflation rates represent convenient, observable bounds on their welfare losses. When inflation peaked in 2022, households at the 10th and 90th percentiles of the inflation distribution and average grocery expenditures faced welfare losses of $573 and $1,145, respectively.

DOI: https://doi.org/10.17016/FEDS.2026.001