Department of Economics
University of California, San Diego
9500 Gilman Dr. #0508
The Optimal Inflation Rate in New Keynesian Models:
Should Central Banks Raise Their Inflation Targets in
Light of the ZLB?
(with Olivier Coibion and Yuriy Gorodnichenko) Review of Economic Studies, 2012, 79(4): 1371--1406,
[online appendix][matlab code]
Abenomics: Preliminary Analysis and Outlook, with Joshua Hausman. Brookings Papers on Economic Activity, Spring 2014: 1-63.
Are Negative Supply Shocks Expansionary at the Zero Lower Bound? Revise and Resubmit at Journal of Political Economy
Abstract: Standard sticky-price models predict that temporary, negative supply shocks are expansionary at the zero lower bound (ZLB) because they raise inflation expectations and lower expected real interest rates, which stimulates consumption. This paper tests that prediction with oil supply shocks, an earthquake, and inflation risk premia, demonstrating that negative supply shocks are contractionary at the ZLB despite also lowering expected real interest rates. These findings are rationalized in a model with financial frictions, where negative supply shocks reduce asset prices and net worth, translating into larger borrowing spreads so that consumption contracts. In this data-consistent model fiscal stimulus at the ZLB is substantially less effective than in standard sticky-price models.
Financial Dampening (updated 2/2015),
with Mu-Jeung Yang
Abstract: We propose a novel mechanism, “financial dampening,” whereby financial sector deleveraging attenuates the effectiveness of monetary policy. In our model of financial intermediation, where banks have leverage targets and asymmetric portfolio adjustment costs, deleveraging banks will have a lower pass-through from reductions in policy rates to credit supply. We find consistent evidence for financial dampening in micro-data on U.S. regulated financial intermediaries. We instrument deleveraging at local banks using average deleveraging at spatially-separate banks of the same bank holding company to isolate local deleveraging independent of local demand conditions. We find that in response to a 1% monetary policy shock, a bank at the 25th percentile of the deleveraging distribution increases its loan growth by 3.70% more than a bank at the 75th percentile according to our baseline specification. Thus, our mechanism provides a rationale for why recoveries from financial crises may be slow.
Fiscal Multipliers at the Zero Lower Bound: International Theory and Evidence.
Abstract: Can fiscal policy be effective in an open economy with flexible exchange rates? Standard open economy models suggest that the open economy fiscal multiplier is small when exchange rates are flexible. This paper reassesses this premise by explicitly incorporating the zero lower bound (ZLB) on nominal interest rates in a small open economy New Keynesian model. It finds (1) when the ZLB binds and uncovered interest rate parity (UIP) holds, then the open economy fiscal multiplier is larger than 1 and bigger than the closed economy fiscal multiplier, (2) these conclusions can be reversed given significant violations of UIP, and (3) for estimated departures from UIP, the open economy fiscal multiplier at the ZLB is above 1 but smaller than the closed economy fiscal multiplier.
Supply-side policies in the Depression: Evidence from France,
with Jeremie Cohen-Setton and Joshua Hausman
Abstract: The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented large-scale mandatory wage increases and hours restrictions. This quickly ended deflation, but output stagnated. We present time-series and cross-sectional evidence that the supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a two-sector model calibrated to match our cross-sectional estimates. We propose an alternative, disequilibrium model consistent with expansionary effects of lower real interest rates and contractionary effects of higher real wages. This model and our empirical evidence suggest that without supply-side problems, France would have recovered rapidly after leaving the gold standard.
Secular Labor Reallocation and Business Cycles,
with Gabriel Chodorow-Reich
Abstract: We study the effect of mean-preserving idiosyncratic industry shocks on business cycle outcomes. We develop an empirical methodology using a local area’s exposure to industry reallocation based on the area’s initial industry composition and employment trends in the rest of the country over a full employment cycle. Using confidential employment data by local area and industry over the period 1980-2014, we find sharp evidence of reallocation contributing to worse employment outcomes during national recessions but not during national expansions. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical results subject to inclusion of two key, empirically plausible frictions: imperfect mobility across industries, and downward nominal wage rigidity. Combining the empirical and model re- sults, we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level.