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Working Paper
Show me the money: the monetary policy risk premium
We study how monetary policy affects the cross-section of expected stock returns. For this purpose, we create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that are theoretically linked to how firms react to monetary policy. We find that stocks whose prices react more positively to expansionary monetary policy surprises earn lower average returns. This finding is consistent with the intuition that monetary policy is expansionary in bad economic times when the marginal value of wealth is high, and thus high MPE stocks serve as a hedge against bad ...
Working Paper
Factor Specificity and Real Rigidities
We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two ...
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 ...
Working Paper
Discretion Rather than Rules: Equilibrium Uniqueness and Forward Guidance with Inconsistent Optimal Plans
New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank?s incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. Private agents taking future central bank actions and their own best responses to them as given reduces the scope for self-fulfilling prophecies. With empirically-reasonable frequencies of central-bank reoptimization, the monetary-policy game has a unique Markov-perfect equilibrium wherein forward guidance ...
Journal Article
The Case of the Reappearing Phillips Curve: A Discussion of Recent Findings
The Phillips curve seems to have flattened over time. In this article, we use a simple New Keynesian model to analyze potential pitfalls in the estimation of the slope of the structural Phillips curve.
Working Paper
Open Mouth Operations
We examine the standard New Keynesian economy?s Ramsey problem written in terms of instrument settings instead of allocations. Its standard formulation makes two instruments available: the path of current and future interest rates, and an ?open mouth operation? which selects one of the many equilibria consistent with the chosen interest rates. Removing the open mouth operation by imposing a finite commitment horizon yields pathological policy advice that relies on the model's forward guidance puzzle.
Working Paper
Long and Plosser Meet Bewley and Lucas
We develop a N-sector business cycle network model a la Long and Plosser (1983), featuring heterogenous money demand a la Bewley (1980) and Lucas (1980). Despite incomplete markets and a well-defined distribution of real money balances across heterogeneous households, the enriched N-sector network model remains analytically tractable with closed-form solutions up to the aggregate level. Relying on the tractability, we establish several important results: (i) The economy's input-output network linkages become endogenously time-varying over the business cycle?thanks to the influence of the ...
Report
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
Approximating Multisector New Keynesian Models
We show that a calibrated three-sector model with a suitably chosen distribution of price stickiness can closely approximate the dynamic properties of New Keynesian models with a much larger number of sectors. The parameters of the approximate three-sector distribution are such that both the approximate and the original distributions share the same (i) average frequency of price changes, (ii) cross-sectional average of durations of price spells, (iii) cross-sectional standard deviation of durations of price spells, (iv) the cross-sectional skewness of durations of price spells, and (v) ...
Working Paper
Equilibrium Yield Curves and the Interest Rate Lower Bound
We study the term structure of default-free interest rates in a sticky-price model with an occasionally binding effective lower bound (ELB) constraint on interest rates and recursive preferences. The ELB constraint induces state-dependency in the dynamics of term premiums by affecting macroeconomic uncertainty and interest-rate sensitivity to economic activities. In a model calibrated to match key features of the aggregate economy and term structure dynamics in the U.S. above and at the ELB, we find that the ELB constraint typically lowers the absolute size of term premiums at the ELB and ...