Search Results
Working Paper
Monetary Policy in a Model of Growth
Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these "scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected ...
Working Paper
Innovation, Productivity, and Monetary Policy
To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests ...
Working Paper
U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter
Using a macroeconomic model, we explore how sources of shocks and vulnerabilities matter for the transmission of U.S. monetary changes to emerging market economies (EMEs). We utilize a calibrated two-country New Keynesian model with financial frictions, partly-dollarized balance sheets, and imperfectly anchored inflation expectations. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities ...
Working Paper
A Model of Slow Recoveries from Financial Crises
This paper documents highly persistent effects of financial crises on output, labor productivity and employment in a sample of emerging economies. To address these facts, it introduces a quantitative macroeconomic model that includes endogenous TFP growth through firm creation. Firm creators obtain funding from a financial intermediation sector which is subject to frictions. These frictions become especially severe in a financial crisis, increasing the cost of credit for firm creators and thereby lowering the growth rate of aggregate TFP. As a consequence, the model produces medium-run ...
Discussion Paper
How Does U.S. Monetary Policy Affect Emerging Market Economies?
The question of how U.S. monetary policy affects foreign economies has received renewed interest in recent years. The bulk of the empirical evidence points to sizable effects, especially on emerging market economies (EMEs). A key theme in the literature is that these spillovers operate largely through financial channels—that is, the effects of a U.S. policy tightening manifest themselves abroad via declines in international risky asset prices, tighter financial conditions, and capital outflows. This so-called Global Financial Cycle has been shown to affect EMEs more forcefully than advanced ...
Working Paper
The International Spillovers of Synchronous Monetary Tightening
We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given ...
Discussion Paper
Financial Stability and Interest Rates
In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.
Working Paper
Banks, Capital Flows and Financial Crises
This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks' precautionary equity issuance makes financial crises infrequent events occurring along with "regular" business cycle fluctuations. We show that an episode of capital infl ows and rapid credit expansion, triggered by low country interest rates, ...
Discussion Paper
The Transmission of Global Risk
Turmoil in the banking sector in the U.S. and Europe in early 2023 brought jitters to financial markets and increased concerns about a global risk-off event. Risk-off episodes—periods of increased global risk aversion—are characterized by sharp increases in credit spreads, high volatility in equity markets, and appreciation of reserve currencies