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Jel Classification:E12 

Working Paper
Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest

I investigate the downward drift of U.S. interest rates from 1984:Q1 to 2019:Q4. For this, I bring the workhorse two-country New Keynesian model to data on the U.S. and an aggregate of its major trading partners using Bayesian techniques. I show that the U.S. natural (or equilibrium) interest rate recovered from the model has fallen more gradually than the long-run U.S. real rate, cushioned by productivity shocks. Since inflation expectations became well-anchored in the ‘90s, this implies that the continued interest rate decline is largely explained by the real rate tracking the natural ...
Globalization Institute Working Papers , Paper 403

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 ...
Globalization Institute Working Papers , Paper 403

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 Papers , Paper 2022-016

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 Series , Paper 2017-12

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 , Paper 18-11

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 Series , Paper WP-2018-3

Working Paper
The Transmission of Monetary Policy under the Microscope

We investigate the transmission of monetary policy to household consumption using detailed administrative data on the universe of households in Norway. Based on a novel series of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households. We find that low-liquidity but also high-liquidity households show strong responses, interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy outweigh direct effects, albeit with a delay. Overall, the ...
Working Paper Series , Paper 2020-03

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 Series , Paper 2013-31

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 Papers , Paper 16-27

Working Paper
Non-Linear Employment Effects of Tax Policy

We study the non-linear propagation mechanism of tax policy in a heterogeneous agent equilibrium business cycle model with search frictions in the labor market and an extensive margin of employment adjustment. The model exhibits endogenous job destruction and endogenous hiring standards in the form of occasionally-binding zero-surplus constraints. After parameterizing the model using U.S. data, we find that the dynamic response of employment to a temporary change in the labor income tax is highly non-linear, displaying sizable asymmetries and state-dependence. Notably, the response to a tax ...
International Finance Discussion Papers , Paper 1333


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