Abstract: We use historical data and a calibrated model of the world economy to study how a synchronous tightening of monetary policy can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given reduction in inflation. We use this framework to show that there are gains from coordination of international monetary policy.
The Inflationary Effects of Sectoral Reallocation (2023) (with Sebastian Graves and Matteo Iacoviello) , Journal of Monetary Economics, 140, November, pp. 64-81. (Paper ) (Appendix ) (Replication Codes )
Abstract: The COVID-19 pandemic has led to an unprecedented shift in consumption expenditures from services to goods. This paper studies the effect of this demand reallocation in a multi-sector New Keynesian model featuring input-output linkages and costs to reallocating labor across sectors. These costs inhibit the increase in the supply of goods, causing inflationary pressures that propagate through the production network. The inflationary effects of this shock are amplified by the fact that goods prices are more flexible than those of services. We estimate the model allowing for a demand reallocation shock, sectoral productivity shocks, and an aggregate labor supply shock. The demand reallocation shock can account for a large portion of the rise in U.S. inflation in the aftermath of the pandemic.
Risky Lending, Bank Leverage and Unconventional Monetary Policy (2019) , Journal of Monetary Economics, Vol 101, January 2019, Pages 100-127. (Paper)
(a previous version of the paper can be found in Finance and Economics Discussion Series 2015-110. Washington: Board of Governors of the FederalReserve System)
Abstract: A standard New Keynesian model is extended to include a rich financial system in which financially constrained banks lend to firms and homeowners via defaultable long-term loans. The model generates two endogenous components of interest rate spreads on mortgages and corporate loans: i) a default premium and ii) a liquidity premium. Financial shocks affecting these premiums can reproduce the behavior of several macroeconomic variables during the Great Recession, when we take into account the impact of the zero-lower-bound. The model is also used to quantify the effect of the Federal Reserve's purchases of mortgage-backed securities during the last recession.
A Model of Endogenous Loan Quality and the Collapse of the Shadow Banking System (2018) , American Economic Journal: Macroeconomics, Vol. 10, No. 4, October , pp 152-201. (Paper)
(a previous version of the paper can be found in Finance and Economics Discussion Series, 2015-021, Washington: Board of Governors of the Federal Reserve System)
A short video summarizing the paper, created by the American Economic Association, can be found here
Abstract: I develop a macroeconomic model in which banks can affect loan quality by exerting costly screening effort. Informational frictions limit the amount of external funds that banks can raise. In this framework I consider two types of financial intermediation, traditional banking and shadow banking. By pooling different loans, shadow banks achieve a higher endogenous leverage compared to traditional banks, increasing credit availability. However, shadow banks also make the financial sector more fragile, because of the lower quality of the loans they finance and because of their exposure to bank runs. In this setting unconventional monetary policy can reduce macroeconomic instability.
Corporate Debt Maturity and Business Cycle Fluctuations (with Andrea Prestipino and Immo Schott) (April 2025) (International Finance Discussion Paper (IFDP) - May 2025 )
Long-term debt is the main source of firm-financing in the U.S. We show that accounting for debt maturity is crucial for understanding business cycle dynamics. We develop a macroeconomic model with defaultable long-term debt and equity adjustment costs. With long-term debt, firms have an incentive to increase leverage in order to dilute the value of outstanding debt. When equity issuance is costly, this incentive helps firms raise more debt through a debt dilution channel and mitigates the decline in net worth through a balance sheet channel, dampening the decline in investment in response to a negative financial shock. Using firm-level data, we estimate equity issuance costs and incorporate our findings into an estimated medium-scale DSGE model. Accounting for debt maturity and the cost of equity financing implies that credit supply shocks are the primary drivers of business cycle fluctuations.
Devaluations, Deposit Dollarization and Household Heterogeneity (with Nils Gornemann) (November 2024 ) (Conditionall Accepted at the Review of Economic Studies)
Abstract: We study the aggregate and redistributive effects of currency devaluations in a small open economy model with leverage-constrained banks and heterogeneous households. Our framework captures three stylized facts about financial dollarization in emerging economies: i) a sizable share of domestic deposits are denominated in foreign currency; ii) these deposits represent significant foreign currency liabilities for local banks; and iii) dollar deposits are mainly held by wealthier households. A devaluation increases the real burden of foreign currency debt, causing an erosion of banks' net worth, which depresses credit supply and economic activity. While richer households are partially insulated through their dollar deposits, poorer households cut consumption sharply in response to rising borrowing costs and falling real labor income. In our model deposit dollarization amplifies the contractionary effects of a devaluation on output, investment, and consumption, in line with new empirical evidence for emerging economies. To achieve this result, both constrained intermediaries and heterogeneous households are crucial. In our framework, regulating dollarization can result in widespread welfare gains, especially for poorer households.
Abstract: The deep deterioration in the labor market during the Great Recession, the subsequent slow recovery, and the missing disinflation are hard to reconcile for standard macroeconomic models. We develop and estimate a New-Keynesian model with financial frictions, search and matching frictions in the labor market, and endogenous intensive and extensive labor supply decisions. We conclude that the estimated combination of the low degree of nominal wage rigidities and high degree of real wage rigidities, together with the small role of pre-match costs relative to post-match costs, are key in successfully forecasting the slow recovery in unemployment and the missing disinflation in the aftermath of the Great Recession. We find that endogenous labor supply data are very informative about the relative degree of nominal and real wage rigidities and the slope of the Phillips curve. We also find that none of the model-based labor market gaps are a sufficient statistic of labor market slack, but all contain relevant information about the state of the economy summarized in a new indicator for labor market slack we put forward.
Household Debt and the Heterogeneous Effects of Forward Guidance (with Matthias Paustian) (December 2020 ) (Fed IFDP version here ) (R&R at JMCB)
Abstract: We study how, in a heterogeneous-agent-New-Keynesian (HANK) model with long-term debt, the power of forward guidance depends on three redistributive channels. First, expected lower rates imply a future transfer from savers to borrowers, reducing precautionary motives via a transfer news channel. Second, if debt is nominal, a Fisher channel generates a wealth transfer towards borrowers. Finally, a debt revaluation channel affects the debt burden for constrained agents through fluctuations in bond prices. These channels can make forward guidance more powerful in a HANK model than in a RANK framework when debt is nominal, while the opposite holds with real debt.
Pandemic Inflation (with Andrea Prestipino and Andrea Raffo)
Endogenous Asset Quality and Financial Crises (with Andrea Prestipino)
International Spillovers of Tighter Monetary Policy (December 2022) (FEDS Note)
The Global Recovery: Lessons from the Past (June 2021) (FEDS Note)