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Working Paper
The Swaps Strike Back: Evaluating Expectations of One-Year Inflation
This study examines the forecasting performance of inflation swaps and survey-based expectations for one-year inflation. Conducting this exercise helps determine if one set of expectations can provide a cleaner signal about future inflation. The study finds that, overall, inflation swaps more frequently provide better forecasts of future inflation. Previous studies that found poor performance of swaps were strongly influenced by liquidity issues during the financial crisis and the pandemic. When these periods are excluded, swaps have superior predictive ability. Our analysis suggests that ...
Discussion Paper
The Treasury Tantrum of 2023
In the second half of last year, the 10-year Treasury yield skyrocketed from below 4 percent to above 5 percent, and then back down to 3.9 percent (Figure 1). On the way up, market commentary cited several key drivers for the rapid increase, including strong employment and inflation data, unexpectedly high Treasury issuance, and FOMC communications indicating that rates may need to be higher for longer.
Working Paper
The Equity Premium, Long-Run Risk, & Optimal Monetary Policy
In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated ...
Working Paper
When it Rains it Pours: Cascading Uncertainty Shocks
We empirically document that serial uncertainty shocks are (1) common in the data and (2) have an increasingly stronger impact on the macroeconomy. In other words, a series of bad (positive) uncertainty shocks exacerbates the economic decline significantly. From a theoretical perspective, these findings are puzzling: existing benchmark models do not deliver the observed amplification. We show analytically that a state dependent precautionary motive with respect to uncertainty shocks is required. Our derivations suggest that the state dependent precautionary motive only shows up at fourth ...
Working Paper
Kalshi and the Rise of Macro Markets
Prediction markets offer a new market-based approach to measuring macroeconomic expectations in real-time. We evaluate the accuracy of prediction market-implied forecasts from Kalshi, the largest federally regulated prediction market overseen by the CFTC. We compare Kalshi with more traditional survey and market-implied forecasts, examine how expectations respond to macroeconomic and financial news, and how policy signals are interpreted by market participants. Our results suggest that Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is ...
Discussion Paper
A Simple Macro-Finance Measure of Risk Premia in Fed Funds Futures
In this Note, we use rolling covariances between real and nominal activity in a regression framework, combined with a model averaging approach, to uncover intuitive dynamics in the term premium.