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Working Paper
Optimal Monetary Policy under Negative Interest Rate
In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money ...
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Wealth and Volatility
Periods of low household wealth in United States macroeconomic history have also been periods of high business cycle volatility. This paper develops a simple model that can exhibit self-fulfilling fluctuations in the expected path for unemployment. The novel feature is that the scope for sunspot-driven volatility depends on the level of household wealth. When wealth is high, consumer demand is largely insensitive to unemployment expectations and the economy is robust to confidence crises. When wealth is low, a stronger precautionary motive makes demand more sensitive to unemployment ...
Working Paper
Asset Pledgeability and Endogenously Leveraged Bubbles
We develop a simple model of defaultable debt and rational bubbles in the price of an asset, which can be pledged as collateral in a competitive credit pool. When the asset pledgeability is low, the down payment is high, and bubble investment is unleveraged, as in a standard rational bubble model. When the pledgeability is high, the down payment is low, making it easier for leveraged borrowers to invest in the bubbly asset. As loans are packaged together into a competitive pool, the pricing of individual default risk may facilitate risk-taking. In equilibrium, credit-constrained borrowers may ...
Working Paper
Sticky Leverage: Comment
We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016, henceforth GJS). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.
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Is the Green Transition Inflationary?
We develop a multi-sector New Keynesian model to analyze the inflationary effects of climate policies. Climate policies need not be inflationary, but can generate an inflation-output tradeoff whose size depends on how flexible prices are in the “dirty” and “green” sectors relative to the rest of the economy, and on whether climate policies consist of taxes or subsidies. A quantitative version of the model calibrated to U.S. data on input-output linkages and sectoral heterogeneity in emissions and price stickiness suggests that an increase in carbon taxes would generate a sizable ...
Working Paper
Quantitative Easing in Joseph's Egypt with Keynesian Producers
This paper considers monetary and fiscal policy when tangible assets can be accumulated after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model?s flexible-price allocation mimics Joseph?s saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by tangible assets or the assets ...
Working Paper
Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy
We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps Main Street" by providing consumption insurance. It hurts Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity ...
Working Paper
Labor Market Shocks and Monetary Policy
We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of worker flows in inflation dynamics and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that the four-quarter inflation rate would have been 0.6 percentage points higher ...
Working Paper
Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest
Much consideration has been given among scholars and policymakers to the decline in the U.S. natural rate of interest since the 2007 – 09 global financial crisis. In this paper, I investigate its determinants and drivers through the lens of the workhorse two-country New Keynesian model that captures the trade and technological interconnectedness of the U.S. with the rest of the world economy. Using Bayesian techniques, I bring the set of binding log-linearized equilibrium conditions from this model to the data, but augmented with survey-based forecasts in order to align the solution with ...