Working Papers

Monetary Policy and the Predictability of Nominal Exchange Rates (with Martin Eichenbaum and Sergio Rebelo, 2017).

This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates.

The Correlation of Oil and Equity Prices: The Role of the Zero Lower Bound (with Deepa Datta, Hanna Kwon, and Robert J. Vigfusson, 2017)

Since 2008, oil and equity returns have moved together much more than they did previously. In addition, we show that both oil and equity returns have become more responsive to macroeconomic news. Before 2008, there is little evidence that oil returns were responsive to macroeconomic news. We argue that these results are consistent with a new-Keynesian model that includes oil and incorporates the zero lower bound on nominal interest rates. Our empirical findings lend support the model’s implication that different rules apply at the zero lower bound.

Understanding the New Normal: The Role of Demographics (with Etienne Gagnon and David Lopez-Salido, 2016)

Since the Great Recession, the U.S. economy has experienced low real GDP growth and low real interest rates, including for long maturities. To understand the contribution of demographic factors, we calibrate an overlapping-generation model with a rich demographic structure to observed and projected changes in U.S. population, family composition, life expectancy, and labor market activity. The model accounts for a 1¼–percentage-point decline in both real GDP growth and the equilibrium real interest rate since 1980—essentially all of the permanent declines in those variables according to some estimates. The model also implies that these declines were especially pronounced over the past decade or so because of demographic factors most-directly associated with the post-war baby boom and the passing of the information technology boom. Our results further suggest that real GDP growth and real interest rates will remain low in coming decades, consistent with the U.S. economy having reached a “new normal.”

A Time Series Model of Interest Rates With the Effective Lower Bound (with Elmar Mertens, 2016, revision requested)

Modeling interest rates over samples that include the Great Recession requires taking stock of the effective lower bound (ELB) on nominal interest rates. We propose a flexible time–series approach which includes a “shadow rate”—a notional rate that is less than the ELB during the period in which the bound is binding—without imposing no–arbitrage assumptions. The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.

Inflation Experience and Inflation Expectations: Dispersion and Disagreement Within Demographic Groups (2014)

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.

When are the Effects of Fiscal Policy Uncertainty Large? (2014)

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.

Works in Progress

Does the New Keynesian Model Have a Uniqueness Problem? (with Lawrence Christiano and Martin Eichenbaum).



Comment on Henriksen and Cooley “The Demographic Deficit” (with Etienne Gagnon and David Lopez-Salido, 2017, Journal of Monetary Economics)

Monetary Policy, Incomplete Information, and the Zero Lower Bound (with Chris Gust and David Lopez-Salido, 2017, IMF Economic Review) Working paper version.

In the context of a stylized New Keynesian model, we explore the interaction between imperfect knowledge about the state of the economy and the zero lower bound. We show that optimal policy under discretion near the zero lower bound responds to signals about an increase in the equilibrium real interest rate by less than it would when far from the zero lower bound. In addition, we show that Taylor-type rules that either include a time-varying intercept that moves with perceived changes in the equilibrium real rate or that respond aggressively to deviations of inflation and output from their target levels perform similarly to optimal discretionary policy. Our analysis of first-difference rules highlights that rules with interest rate smoothing terms carry forward current and past misperceptions about the state of the economy and can lead to suboptimal performance.

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, AEJ: Macroeconomics). Working paper version.

This paper compares the evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well anchored in both economies but reveal substantially greater dispersion across forecasters’ long-horizon projections of US inflation. Analysis of daily data on inflation swaps and nominal-indexed bond spreads, which gauge compensation for expected inflation and inflation risk, also suggests that long-run inflation expectations are more firmly anchored in the euro area than in the United States.