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Working Paper
Inflation Disagreement Weakens the Power of Monetary Policy
We present empirical evidence that household inflation disagreement weakens the power of forward guidance and conventional monetary policy shocks. The attenuation effect is stronger when inflation forecasts are positively skewed and it is not driven by endogenous responses of inflation disagreement to contemporaneous shocks. These empirical observations can be rationalized by a model featuring heterogeneous beliefs about the central banks' inflation target. An agent who perceives higher future inflation also perceives a lower real interest rate and thus borrows more to finance consumption, ...
Working Paper
Capital Misallocation and Secular Stagnation
The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth--even when these technologies replaced considerably less productive tangible technologies--because of structurally low interest rates caused by demographic forces. This insight is obtained in a model in which intangible capital cannot attract external finance, firms are credit constrained, and there is substantial dispersion in productivity. In a tangibles-intense economy with highly leveraged firms, low rates enable more borrowing and faster debt repayment, reduce misallocation, ...
Working Paper
Explaining the Boom-Bust Cycle in the U.S. Housing Market: A Reverse-Engineering Approach
We use a simple quantitative asset pricing model to ?reverse-engineer? the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage ...
Working Paper
Human Capital in a Time of Low Real Rates
We argue that a long-term low real rate environment can increase labor income inequality, amplify the emergence of the working rich, and reduce intergenerational mobility. We provide a simple model with endogenous human capital accumulation and credit constraints to demonstrate this causal link. The mechanism operates through a tilting of the human capital gradient: wealthy households, more so than poor households, will increase human capital investment in response to low rates. Normatively, these tilting responses to low rates are inefficient, but higher capital taxes are not an ideal ...
Report
Coordinating monetary and macroprudential policies
The financial crisis has prompted macroeconomists to think of new policy instruments that could help ensure financial stability. Policymakers are interested in understanding how these should be set in conjunction with monetary policy. We contribute to this debate by analyzing how monetary and macroprudential policy should be conducted to reduce the costs of macroeconomic fluctuations. We do so in a model in which such costs are driven by nominal rigidities and credit constraints. We find that, if faced with cost-push shocks, policy authorities should cooperate and commit to a given course of ...
Working Paper
A tale of two commitments: equilibrium default and temptation
I construct the life-cycle model with equilibrium default and preferences featuring temptation and self-control. The model provides quantitatively similar answers to positive questions such as the causes of the observed rise in debt and bankruptcies and macroeconomic implications of the 2005 bankruptcy reform, as the standard model without temptation. However, the temptation model provides contrasting welfare implications, because of overborrowing when the borrowing constraint is relaxed. Specifically, the 2005 bankruptcy reform has an overall negative welfare effect, according to the ...
Working Paper
Inflation Disagreement Weakens the Power of Monetary Policy
Household inflation disagreement weakens the impact of forward guidance and monetary policy shocks, especially when inflation forecasts are positively skewed. This attenuation effect is not driven by endogenous responses of inflation disagreement to contemporaneous shocks. A model with heterogeneous beliefs about the central bank’s inflation target explains these observations. Agents expecting higher future inflation perceive lower real interest rates and borrow more, constrained by borrowing limits. Increased inflation disagreement results in more borrowing-constrained agents, leading to ...
Working Paper
Nominal Maturity Mismatch and the Liquidity Cost of Inflation
We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Households hold nominal liabilities with longer duration than their nominal assets. Due to this mismatch, losses from unexpected inflation concentrate over short horizons while gains accumulate over the long run, harming liquidity-constrained households who cannot borrow against future gains. The 2021–2022 inflation shock caused welfare losses valued at 1.1% of lifetime wealth for the lower half of the wealth distribution—equivalent in dollar terms to 47% of annual consumption. More ...
Working Paper
Private Capital Flows, Capital Controls, and Default Risk
What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging market capital flows more efficient? If not, can controls on capital flows improve welfare? This paper shows that the answers depend on the form of default risk. When private loans are enforceable, but there is the risk that the government will default on behalf of all residents, private lending is inefficient and capital controls are potentially Pareto-improving. However, when private agents may individually default, capital flow subsidies are potentially Pareto-improving.