Étienne Gagnon

Welcome to my personal web page.  I am currently an associate director in the Division of International Finance at the Federal Reserve Board, where my work covers a range of international macro issues.  My current research interests center on the macroeconomic implications of demographic transitions, inequality, and product variety growth.

Bienvenu sur ma page personnelle.  Je suis un directeur associé dans la Division de Finance Internationale à la Réserve fédérale américaine où je travaille sur les enjeux macroéconomiques internationaux.  Mes recherches courantes portent sur les effets macroéconomiques des transitions démographiques, des inégalités et de la croissance de l'offre de biens et services.  

Professional page - Page professionnelle

Working papers - Cahiers de recherche

Aladangady, Aditya, Etienne Gagnon, Benjamin K. Johannsen, and William B. Peterman (2021).  "Macroeconomic Implications of Inequality and Income Risk," Finance and Economics Discussion Series 2021-73. Board of Governors of the Federal Reserve System (U.S.).  

Abstract:  We explore the long-run relationship between income risk, inequality, and the macroeconomy in an overlapping-generations model in which households face uncertain streams of labor income and returns on their savings. To manage those risks, households can apportion their savings to a bond, whose return is safe and identical across households, and a productive asset, whose return is uncertain and can differ persistently across households. We find that greater polarization in households’ labor income and returns on their savings generally accentuates households’ demand for risk-free assets and the compensation they require for bearing risk, leading to higher measured income and wealth inequality, a lower risk-free real interest rate, and higher risk premiums. These findings suggest that the factors behind the observed rise in inequality over the past few decades might have contributed to the observed fall in the risk-free real interest rate and widening gap between the risk-free real interest rate and the rate of return on capital. We also find that the magnitude of the decline in the risk-free real interest rate and offsetting rise in risk premiums depend importantly on the source of income polarization, with the effects being especially large when greater inequality is caused by increased dispersion in returns on risky assets. Thus, the macroeconomic implications not only depend on the amount of inequality, but also the source of this inequality.

Chung, Hess, Etienne Gagnon, Taisuke Nakata, Matthias Paustian, Bernd Schlusche, James Trevino, Diego Vilan, and Wei Zheng (2019).  "Monetary Policy Options at the Effective Lower Bound: Assessing the Federal Reserve's Current Policy Toolkit," Finance and Economics Discussion Series 2019-003. Board of Governors of the Federal Reserve System (U.S.).  [Revision requested.]

Abstract:  We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession.  Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point.  We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump.  However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags.  As with any model-based analysis, we also discuss a number of caveats regarding our results.


Gagnon, Etienne, Benjamin K. Johannsen, and David López-Salido (2022).  "Supply-Side Effects of Pandemic Mortality: Insights from an Overlapping-Generations Model," B.E. Journal of Macroeconomics, Special Issue: The Macroeconomic Implications of the Covid-19 Pandemic., vol. 22(1), pp. 1-21. 

Abstract:  We use an overlapping-generations model to explore the implications of mortality during pandemics for the economy’s productive capacity. Under current epidemiological projections for the progression of COVID-19, our model suggests that mortality will have, in itself, only small effects on output and factor prices because projected mortality is small in proportion to the population and skewed toward individuals who are retired from the labor force. That said, we show that if the spread of COVID-19 is not contained, or if the ongoing pandemic were to follow a mortality pattern similar to the 1918–1920 Great Influenza pandemic, then the effects on the productive capacity would be economically significant and persist for decades.

Finance and Economics Discussion Series version: July 2020

Replication files: Here.

Caldara, Dario, Etienne Gagnon, Enrique Martínez-García, and Christopher J. Neely (2021).  "Monetary Policy and Economic Performance since the Financial Crisis," Review, Federal Reserve Bank of St. Louis, vol. 103(4), pp. 425-60

Abstract:  We review macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.

Finance and Economics Discussion Series: August 2020

Gagnon, Etienne, Benjamin K. Johannsen, and David López-Salido (2021).  "Understanding the New Normal: The Role of Demographics," IMF Economic Review, vol. 69(2), pp. 357-90.   

Abstract:  Since the Great Recession, the U.S. economy has experienced low real GDP growth and low real interest rates, including for long maturities. We show that these developments were largely predictable by calibrating 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."

Replication files:  Here.

Finance and Economics Discussion Series:  October 2016.

Some press coverage: Washington Post, Bloomberg, Wall Street Journal

Gagnon, Etienne, and David López-Salido (2020).  "Small Price Responses to Large Demand Shocks,"  Journal of the European Economic Association, vol. 18(2), pp. 792-828. 

Abstract:  We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor confl‡icts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We  find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with ‡flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and despite stores adjusting prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' ’pricing movements and recourse to sales and promotions.

Finance and Economics Discussion Series version: March 2014

Slides: English or Portuguese

Wall Street Journal blog: here

Gagnon, E., B. Johannsen, and D. Lopez-Salido (2018). "Comment on the Demographic Deficit," Journal of Monetary Economics., vol. 93 (January), pp. 63-67.  

This comment on Cooley and Henriksen (2018) was prepared for the 2017 Carnegie-Rochester-NYU conference on Public Policy. 

Gagnon, Etienne, David López-Salido, and Jason Sockin (2017).  "The Cyclicality of Sales, Regular, and Effective Prices: Comment," American Economic Review, vol. 107(10), pages 3229-42.

Abstract:  Coibion, Gorodnichenko, and Hong (2015) argue that the CPI underestimates the deceleration in consumer prices during economic downturns because the index fails to account for the reallocation of consumer spending from high- to low-price stores. We show that this conclusion hinges on some nonstandard methodological choices, including an aggressive censoring of price adjustments and the systematic imputation of missing price adjustments with zeros. Under our preferred methodology, the authors' regression results no longer indicate that greater store switching during downturns is a statistically or economically significant phenomenon.

Online appendix: here

Latest working paper update: January 2017

Finance and Economics Discussion Series version: July 2015

Replication files: here

Gagnon, Etienne, Benjamin Mandel, and Robert J. Vigfusson (2014).  "Missing Import Price Changes and Low Exchange Rate Pass-Through," American Economic Journal: Macroeconomics, vol. 6(2), pp. 156-206.

Abstract:  A large body of empirical work has found that exchange rate movements have only modest effects on inflation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have different implications for the timing and size of these biases. Using Bureau of Labor Statistics (BLS) microdata, we derive empirical bounds on the magnitude of these biases and construct alternative price indexes that are less subject to selection effects. Our analysis suggests that the biases induced by selective exits and entries are modest over typical forecast horizons. As such, the empirical evidence continues to support the conclusion that exchange rate pass-through to U.S. import prices is low. 

International Finance Discussion Papers version: December 2012

Gagnon, Etienne, David López-Salido, and Nicolas Vincent (2012).  "Individual Price Adjustment along the Extensive Margin," NBER Macroeconomics Annual 2012, Inc, pp. 235-81.

Abstract:  Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level. 

NBER working papers version: July 2012

International Finance Discussion Papers version: June 2012

Slides: April 2012

Data behind figures: here

Gagnon, Etienne (2009).  "Price Setting during Low and High Inflation: Evidence from Mexico," Quarterly Journal of Economics, vol. 124(3), pp. 1221-63.

Abstract:  This paper provides new insight into the relationship between inflation and consumer price setting by examining a large data set of Mexican consumer prices covering episodes of both low and high inflation, as well as the transition between the two. Overall, the economy shares several characteristics with time-dependent models when the annual inflation rate is low (below 10-15%), while displaying strong state dependence when inflation is high (above 10-15%). At low inflation levels, the aggregate frequency of price changes responds little to movements in inflation because movements in the frequency of price decreases partly offset movements in the frequency of price increases. When the annual inflation rate rises beyond 10-15 percent, however, there are no longer enough price decreases to counterbalance the rising occurrence of price increases, making the frequency of price changes more responsive to inflation. It is shown that a simple menu-cost model with idiosyncratic technology shocks predicts remarkably well the level of the average frequency and magnitude of price changes over a wide range of inflation.

International Finance Discussion Papers version:  May 2007

Slides:  January 2008

Replication files : here  (New: My Mexican micro dataset for 1993:m9-2010:m12 period is now available!)

Short notes - Notes de recherche

Chung, H., E. Gagnon, J. Hebden, K. Kim, B. Schlusche, E. Till, J. Trevino, and D. Vilán (2023). "Balance Sheet Policies in an Evolving Economy: Some Modelling Advances and Illustrative Simulations," FEDS Notes.  Washington: Board of Governors of the Federal Reserve System, February 3.

Crawley, E., E. Gagnon, J. Hebden, and J. Trevino (2022). "Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion," FEDS Notes.  Washington: Board of Governors of the Federal Reserve System, June 3.

Gagnon, E. and D. Lopez-Salido (2015). "Mass Population Displacement and Retail Activities in the Wake of Hurricane Katrina," FEDS NotesWashington: Board of Governors of the Federal Reserve System, August 26.

Bowman, David, Etienne Gagnon, and Michael P. Leahy. (2010).  "Interest on Excess Reserves as a Monetary Policy Instrument: the Experience of Foreign Central Banks," International Finance Discussion Papers 996, Board of Governors of the Federal Reserve System.

Abstract:  This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tightening that included increasing these policy rates been achieved without reliance on reductions in reserves or other deposits held at the central bank? The foreign experience suggests that policy rate floors can be effective lower bounds for market rates, although incomplete access to central bank accounts and interest on them weakens this result. In addition, the foreign experience suggests that tightening by increasing the interest rate paid on central bank balances can help reduce or eliminate the need to drain balances. These results are consistent with theoretical results that show that tightening without draining is possible, irrespective of whether excess reserves are large or small.