Working Papers

The Risk Channel of Unconventional Monetary Policy 
Abstract: This paper examines how unconventional monetary policy affects asset prices and macroeconomic conditions by reallocating risk in the economy. I consider an environment with two main ingredients: heterogeneity in risk tolerance and limited asset market participation. Risk-tolerant investors take leveraged positions, exposing the economy to balance sheet recessions. Limited asset market participation implies the balance sheet of the central bank is non-neutral. Unconventional monetary policy reduces the risk premium and endogenous volatility. During balance sheet recessions, asset purchases boost investment and growth. In contrast, during normal times, the expectation of future interventions reduces growth by its impact on savings. A commitment by the central bank to unwind its portfolio early, conditional on the recovery of leveraged institutions' balance sheet, reduces the risk premium by more than strategies involving holding its portfolio for longer. Asset purchases also have implications for the concentration of risk. Leveraged institutions respond to the policy by reducing risk-taking relatively more than risk-averse investors. As risk concentration falls, the probability of negative tail-events is reduced, enhancing financial stability.

(joint with Robert M. Townsend)
Abstract: We study the risk-taking behavior of entrepreneurs in an environment with two main ingredients: finite lives and uninsurable idiosyncratic risk on the business. We show that the fraction of wealth invested in the business depends on the idiosyncratic risk premium and that it declines substantially over the life cycle. The consumption-wealth ratio is U-shaped over the life cycle. We solve for the wealth distribution both across and within age groups. We show that the variance of wealth conditional on age has an inverted-U shape, initially increasing with age and eventually declining. We find support for these predictions in the data using a survey of entrepreneurial activity in Thailand. We also consider the impact of financial development and demographic transitions on asset prices, economic activity, and inequality. We show that an increase in the fraction of idiosyncratic risk entrepreneurs can insure or a decline in population growth will lead to a reduction in the idiosyncratic risk premium, an increase in the capital stock of the economy, and a decline in inequality.

(joint with Nicolas Caramp)
Abstract: We revisit the monetary paradoxes of standard monetary models in a liquidity trap and study the channels through which they occur. We focus on two paradoxes: the Forward Guidance Puzzle and the Paradox of Flexibility. First, we propose a decomposition of consumption into substitution and wealth effects, both of which take into account the general equilibrium effects on output and inflation, and we show that the substitution effect cannot account for the puzzles. Instead, monetary paradoxes are the result of strong wealth effects which, generically, are solely determined by the expected fiscal response to the monetary shocks. We estimate the fiscal response to monetary policy shocks and find responses with the opposite sign to the ones implied by the standard equilibrium. Finally, we introduce the estimated fiscal responses into a medium-size DSGE model. We find that the impulse-response of consumption and inflation do not match the data, suggesting that wealth effects induced by fiscal policy are important even outside of the liquidity trap.

Work in progress

Risk externalities
(joint with Felipe Iachan)

Optimal Fiscal Consolidation in a Currency Union