19.10.2021: Hélène Rey – Central bank policy and the concentration of risk: empirical estimates

Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

05.10.2021: Saki Bigio – A model of credit, money, interest, and prices

Presenter: Saki Bigio Affiliation: University of California, Los Angeles, Department of Economics. Paper: A Model of Credit, Money, Interest, and Prices Date: October 05, 2021 Time: 15:00 IDT (GMT+3) Abstract: This paper integrates a realistic implementation of monetary policy through the banking system into an incomplete-market economy with wage rigidity. Monetary policy sets policy rates … Read more

10.08.2021: Tarek Hassan – Country risk

We construct new measures of country risk and sentiment as perceived by global investors and executives using textual analysis of the quarterly earnings calls of publicly listed firms around the world. Our quarterly measures cover 45 countries from 2002-2020. We use our measures to provide a novel characterization of country risk and to provide a harmonized definition of crises. We demonstrate that elevated perceptions of a country’s riskiness are associated with significant falls in local asset prices and capital outflows, even after global financial conditions are controlled for. Increases in country risk are associated with reductions in firm-level investment and employment. We also show direct evidence of a novel type of contagion, where foreign risk is transmitted across borders through firm-level exposures. Exposed firms suffer falling market valuations and significantly retrench their hiring and investment in response to crises abroad. Finally, we provide direct evidence that heterogeneous currency loadings on global risk help explain the cross-country pattern of interest rates and currency risk premia.

05.08.2021: Iván Werning – Dynamic oligopoly and price stickiness

How does market concentration affect the potency of monetary policy? The ubiquitous monopolistic-competition framework is silent on this issue. To tackle this question we build a model with heterogeneous oligopolistic sectors. In each sector, a finite number of firms play a Bertrand dynamic game with staggered price rigidity. Following an extensive Industrial Organization literature, we focus on Markov equilibria within each sector. Aggregating up, we study monetary shocks and provide a closed form formula for the response of aggregate output, highlighting three measurable sufficient statistics: demand elasticities, market concentration, and markups. We calibrate our model to the empirical evidence on pass-through, and find that higher market concentration significantly amplifies the real effects of monetary policy. To separate the strategic effects of oligopoly from the effects this has on residual demand, we compare our model to one with monopolistic firms after modifying consumer preferences to ensure firms face comparable residual demands. Finally, the Phillips curve for our model displays inflation persistence and endogenous cost-push shocks.

07.07.2021: Ludwig Straub – Exchange rates and monetary policy with heterogeneous agents: sizing up the real income channel

Introducing heterogeneous households to a New-Keynesian small open economy model amplifies the real income channel of exchange rates: the rise in import prices from a depreciation lowers households’ real incomes, and leads them to cut back on spending. This channel counteracts the standard expenditure-switching channel of exchange rates, and can result in a contractionary effect of a depreciation on domestic output. We study the monetary policy implications of a large and dominant real income channel.

29.06.2021: Sydney Ludvigson – Belief distortions and macroeconomic fluctuations

This paper combines a data rich environment with a machine learning algorithm to provide new estimates of time-varying systematic expectational errors (belief distortions) embedded in survey responses. We find that distortions are large on average even for professional forecasters, with all respondent-types over-weighting their own beliefs relative to other information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by large margins, with over-optimism associated with an increase in aggregate economic activity. Biases in expectations evolve dynamically in response to cyclical shocks. Biases about economic growth display greater initial under-reaction while those about inflation display greater delayed over-reaction.

28.06.2021: Jennifer La’O – Optimal monetary policy and communication with an informationally-constrained central banker

We study optimal monetary policy and central bank communication when firms make nominal pricing decisions under uncertainty and when the monetary authority likewise has incomplete information about the current economic state. We find that the optimal monetary policy implements flexible-price allocations despite this multitude of measurability constraints; we explore a series of different implementations. Away from such policies, we find that public communication by the central bank is welfare-improving as long as either firm information or central bank information is sufficiently precise.

02.06.2021: Vania Stavrakeva – A fundamental connection: exchange rates and macroeconomic expectations

This paper presents new stylized facts about exchange rates and their relationship with macroeconomic fundamentals. We show that macroeconomic surprises explain, on average, about 70 percent of variation in nominal exchange rate changes at quarterly frequency. Using a novel present value decomposition of exchange rate changes that is disciplined with survey forecast data, we further show that macroeconomic surprises are also a very important driver of the currency risk premia component and explain about 50 percent of its variation. These surprises have even greater explanatory power during periods of economic downturns and financial uncertainty.

19.05.2021: Elisa Rubbo – Networks, Phillips curves, and monetary policy

I develop an analytical framework for monetary policy in a multi-sector economy with a general input-output network. I derive the Phillips curve and welfare as a function of the underlying production primitives. Building on these results, I characterize (i) the correct definition of aggregate inflation and (ii) how the optimal policy trades off inflation in different sectors, based on the production structure. I construct two novel inflation indicators. The first yields a well-specified Phillips curve. Consistent with the theory, this index provides a better fit in Phillips curve regressions than conventional specifications with consumer prices. The second is an optimal policy target, which captures the tradeoff between stabilizing aggregate output and relative output across sectors. Calibrating the model to the U.S. economy I find that targeting consumer inflation generates a welfare loss of 0.8% of per-period GDP relative to the optimal policy, while targeting the output gap is close to optimal.

03.05.2021: Francesco Bianchi – The monetary/fiscal policy mix

This note presents an overview of my research on the monetary/fiscal policy mix. I discuss why central bank’s ability to control inflation requires fiscal backing. The post-Volcker consensus about the importance of central bank independence was a response to the fiscal nature of the Great Inflation of the 1970s. This consensus is now called into question in light of the limits of monetary policy and the little appetite for fiscal orthodoxy following two severe re- cessions. In this context, a coordinated strategy between the monetary and fiscal authorities works as an automatic stabilizer, reducing the likelihood of a disastrous conflict between the two authorities. Under this coordinated strategy, the fiscal authority introduces an emergency budget, while the monetary authority announces a temporary increase in the inflation target to accommodate the emergency budget. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention. In the context of the Euro area, Eurobonds could be used to achieve better coordination between monetary and fiscal policy.

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