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]
Are Negative Supply Shocks Expansionary at the Zero Lower Bound?.
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.
Abenomics: Preliminary Analysis and Outlook.(with Joshua Hausman) prepared for Brookings Papers on Economic Activity
Abstract: In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a two percent inflation target and specified concrete actions to achieve this goal by 2015. Shinzo Abe’s government is supporting this change with fiscal policy and structural reforms. We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.7 per- centage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In the medium and long-run, Abenomics will likely continue to be stimulative. But the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan’s large output gap. In part this is because the Bank of Japan’s two percent inflation target is not yet fully credible. We conclude by outlining how to interpret future data releases in light of our results.
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.
Coming Soon (available upon request):
Slow Recoveries in the Aftermath of Financial Crises: Financial Acceleration vs. Dampening.
(with Mu-Jeung Yang
Abstract: We document a systematic change in the behavior of financial sector leverage and credit growth, which declined more strongly and persistently in post-1990 recessions and recoveries compared to pre-1990 recessions and recoveries, and provide evidence that this has reduced the efficacy of monetary policy in engineering a rapid recovery. 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 call this novel mechanism financial dampening. We find strong support for financial dampening in micro-data on U.S. regulated financial intermediaries. In response to a 1% monetary policy shock, a bank at the 10th percentile of the deleveraging distribution increases its loan growth by 1.7% more than a bank at the 90th percentile according to our baseline specification. Using these estimates we illustrate that by reducing the effectiveness of monetary policy financial dampening was likely an important contributor to slow post-1990 recoveries.