Bias in Local Projections (with Edward P. Herbst, 2020)
Local projections (LPs) are a popular tool in applied macroeconomic research. We survey the related literature and find that LPs are often used with very small samples in the time dimension. With small sample sizes, given the high degree of persistence in most macroeconomic data, impulse responses estimated by LPs can be severely biased. This is true even if the right-hand-side variable in the LP is iid, or if the data set includes a large cross-section (i.e., panel data). We derive simple expressions for this bias in a variety of settings. As a byproduct, we propose a way to bias-correct LPs. We also show that, in small samples, autocorrelation-robust standard errors can dramatically understate the uncertainty surrounding LP estimators, even when appropriate. Our results suggest, in LP settings like the ones we study, researchers should avoid them. Using U.S. macroeconomic data and identified monetary policy shocks, we demonstrate that the bias in point estimates can be economically meaningful and the bias in standard errors can affect inference.
Does the New Keynesian Model have a Uniqueness Problem? (with Lawrence J. Christiano and Martin S. Eichenbaum, NBER Working Paper, No. 24612, 2018, revision requested).
This paper addresses whether non-uniqueness of equilibrium is a substantive problem for the analysis of fiscal policy in New-Keynesian (NK) models at the zero lower bound (ZLB). There would be a substantive problem if there were no compelling way to select among different equilibria that give different answers to critical policy questions. We argue that learnability provides such a criterion. We study a fully non-linear NK model with Calvo pricing frictions. Our main finding is that the model we analyze has a unique E-stable rational expectations equilibrium at the ZLB. That equilibrium is also stable-under-learning and inherits all of the key properties of linearized NK models for fiscal policy.
Using consumption data from the Consumer Expenditure Survey, I document persistent differences across demographic groups in the dispersion of household-specific rates of inflation. Using survey data on inflation expectations, I show that demographic groups with greater dispersion in experienced inflation also disagree more about future inflation. I argue that these results can be rationalized from the perspective of an imperfect information model in which idiosyncratic inflation experience serves as a signal about aggregate inflation.
Using a new-Keynesian model with endogenous capital accumulation, I show that uncertainty about fiscal policy can cause large declines in consumption, investment, and output when the zero lower bound (ZLB) binds, but has modest effects when the monetary authority is not constrained by the ZLB. I study uncertainty about the level of government spending and uncertainty about tax rates on consumption, wages, capital income, and investment. In my model, uncertainty about government spending and the wage tax rate has particularly large effects. I show that the effects of fiscal policy uncertainty are largest when the nominal interest rate is on the cusp of the ZLB and also that delaying fiscal policy uncertainty diminishes its effects only if the resolution of uncertainty occurs after ZLB no longer binds.
Publications and Accepted Papers
Understanding the New Normal: The Role of Demographics (with Etienne Gagnon and David Lopez-Salido, accepted, IMF Economic Review).
Supply-Side Effects of Pandemic Mortality: Insights from an Overlapping-Generations Model (with Gagnon, Etienne and David Lopez-Salido, accepted, B.E. Journal of Macroeconomics).
A Time Series Model of Interest Rates With the Effective Lower Bound (with Elmar Mertens, Accepted, Journal of Money, Credit & Banking)
Oil, Equities, and the Zero Lower Bound (with Deepa Datta, Hanna Kwon, and Robert J. Vigfusson, 2021, American Economic Journal: Macroeconomics)
Monetary Policy and the Predictability of Nominal Exchange Rates (with Martin Eichenbaum and Sergio Rebelo, 2021, The Review of Economic Studies).
Comment on Henriksen and Cooley “The Demographic Deficit” (with Etienne Gagnon and David Lopez-Salido, 2018, Journal of Monetary Economics)
Understanding the Volatility of the Canadian Exchange Rate (with Martin Eichenbaum and Sergio Rebelo, 2018, C.D. Howe Institute)
Monetary Policy, Incomplete Information, and the Zero Lower Bound (with Chris Gust and David Lopez-Salido, 2017, IMF Economic Review) Working paper version.
Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States? (with Meredith J. Beechey and Andrew T. Levin, 2011, American Economic Journal: Macroeconomics). Working paper version.
Strengthening the FOMC’s Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies (with Fernando Duarte, Leonardo Melosi, and Taisuke Nakata, 2020)
The analysis in this paper was presented to the Federal Open Market Committee as background for its discussion of the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. The Committee discussed issues related to the review at five consecutive meetings from July 2019 to January 2020.
The Neutral Rate and the Summary of Economic Projections (with Michelle Bongard, 2016, FEDS Note)
The Expected Real Interest Rate in the Long Run: Time Series Evidence with the Effective Lower Bound (with Elmar Mertens, 2016, FEDS Note)