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Discussion Paper
Financial Vulnerability and Macroeconomic Fragility
What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
Working Paper
The Dynamic Distribution in the Fixed Cost Model: An Analytical Solution
I derive an analytical solution to the Kolmogorov forward equation for fixed cost models. This is a challenging PDE because the dynamic distribution depends on the flow of resetting agents, which is endogenously determined by the distribution itself. I show that there is a shortcut that allows the reset flow to be derived without first finding the entire distribution of agents. This shortcut is also valuable because many aggregate variables can be written in terms of the reset flow alone. Steady-state conditional adjustment behavior recovers the entire marginal reset-flow response to a common ...
Report
Central bank transparency and nonlinear learning dynamics
Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive ...