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Working Paper
Capital Controls and the Global Financial Cycle
Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are ...
Journal Article
To Reach the Fed’s Inflation Target, Interest Rates May Have to Remain Restrictive for Some Time
The Federal Reserve has raised the federal funds rate by 500 basis points since March 2022. But how tight is the current policy stance? We account for the federal funds rate, inflation expectations, and the natural rate of interest and find that monetary policy has only been restrictive since 2023:Q1. We find that to bring inflation down to 2 percent, the Federal Reserve may have to keep the federal funds rate in restrictive territory for some time.
Journal Article
Recent Appreciation in the U.S. Dollar Unlikely to Have Large Effect on Domestic Inflation
The U.S. dollar has appreciated more than 8.5 percent since May 2021, raising questions about potential effects on domestic inflation. If imports are billed in foreign currencies, then a strong dollar could reduce import prices and therefore domestic inflation. However, U.S. imports are almost entirely invoiced in U.S. dollars, dampening this effect. We find that the recent appreciation in the U.S. dollar has a negligible effect on domestic inflation as measured by the core price index for personal consumption expenditures.
Journal Article
Testing Hybrid Forecasts for Imports and Exports
The quality of economic forecasts tends to deteriorate during times of stress such as the COVID-19 pandemic, raising questions about how to improve forecasts during exceptional times. One method of forecasting that has received less attention is refining model-based forecasts with judgmental adjustment, or hybrid forecasting. Judgmental adjustment is the process of incorporating information from outside a model into a forecast or adjusting a forecast subjectively. Hybrid forecasts could be particularly useful during extraordinary times such as the COVID-19 pandemic, as models that do not ...
Journal Article
China's Post-COVID Recovery: Implications and Risks
China removed most of its COVID-19 restrictions in November 2022 following a year of weak growth. Despite initial uncertainty about sustained COVID-19 outbreaks, the Chinese economy has begun to rebound, driven by domestic consumption. The rebound is likely to boost global growth.
Working Paper
National Interests, Spillovers and Macroprudential Coordination
This paper presents a simple two-region banking model of liquidity mismatch to study the strategic interactions between national regulators. I show that banks hold insufficient liquidity, which has repercussions for other banks in an international financial market. The model justifies coordinated prudential liquidity regulation due to an international fire-sale externality. However, I theoretically and empirically argue that domestically oriented regulators from jurisdictions with a smaller banking sector do not internalize the global benefits of regulation and therefore do not adhere to ...
Journal Article
Labor Shortages in the Healthcare Sector Have Eased, Which May Soften Price Pressures
Following severe labor shortages during the post-pandemic recovery, employment and wage growth in the healthcare sector have returned to their pre-pandemic trends. The healthcare sector is labor intensive, and inflation in the sector has historically tracked wage growth. Thus, lower wage growth may limit price pressures in the healthcare sector.
Journal Article
Current Monetary Policy May Be Less Restrictive Than It Seems
Compared with most historical inflationary episodes since the 1960s, the current U.S. inflation cycle features both higher core inflation and a more resilient real economy. This co-movement of prices and real activity suggests monetary policy has not sufficiently reduced demand. We examine the current policy stance and argue that interest rates may indeed be less restrictive than commonly thought. To lower inflation to 2 percent, the Federal Reserve may have to maintain a restrictive policy stance for some time.
Journal Article
Price Pressures for U.S. Exporters and a Strong Dollar Have Increased Inflation in Foreign Countries
As the higher demand for imported goods during the pandemic has moderated, U.S. export prices have become an important factor in determining inflationary pressures from the United States. As of 2022:Q2, export prices increased by 11.8 percent annualized, far exceeding the historical average of 3.75 percent. Further, 58 percent of the increase in export prices can be attributed to the recent appreciation of the U.S. dollar, while the remaining 42 percent can be attributed to price pressures for U.S. exporters.
Working Paper
The Missing Tail Risk in Option Prices
This paper contributes to the literature on deviations from rational expectations in financial markets and to the literature on evaluating density forecasts. We first develop a novel statistic to evaluate the overall accuracy of distributional forecasts, and find two methods that yield accurate distributional forecasts. We then propose another statistic to examine the relative accuracy over the entire distribution range. Our results indicate more oil price realizations in the left tail than predicted. We argue that this finding points to a persistent behavioral forecasting bias and a ...