Research

Publications

We integrate Keynesian economics with general equilibrium theory in a new way. We develop a simple graphical apparatus, the IS-LM-NAC framework, that can be used by policy makers to understand how policy affects the economy. A new element, the No-Arbitrage-Condition (NAC) curve, connects the interest rate to current and expected future values of the stock market and it explains how ‘animal spirits’ influence economic activity. Our framework provides a rich new approach to policy analysis that explains the short-run and long-run effects of policy.


This paper studies determinacy conditions in the neoclassical monetary model where money enters utility and the production function and when the central bank follows an interest rate rule. In addition to inflation, I let the central bank respond to output, a case empirically relevant but seemingly overlooked in the existing literature. I find that the determinacy conditions depend on the interest elasticity of output and that, generally, the Taylor principle is neither necessary nor sufficient for determinacy. This is in stark contrast with the New Keynesian model, where a sufficiently strong response to inflation or output leads to determinacy.



Working Papers

Financial crises rapidly spread across countries, causing crashes in equity prices that cannot be explained solely by fundamentals. This paper develops a novel two-country dynamic general-equilibrium model of global financial crises with a distinction between interdependence and financial contagion. While interdependence occurs through trade and capital flows, contagion is a market “overreaction” that occurs through a new channel: confidence. In my model, even though consumers are fully rational, contagion is possible due to multiplicity of dynamic and steady-state equilibria. When consumers form self-fulfilling beliefs about equity prices, shocks to those beliefs may shift the economy from one steady state to another. This creates an amplification of the negative effects, hence contagion. The model has three policy implications. Firstly, monetary policy is effective in offsetting recessions without creating inflation, and coordinated international policy may improve welfare even further. Secondly, restrictions on capital mobility prevent contagion. Finally, better trust in the government can help to prevent negative confidence shocks. These policy recommendations highlight the independent role of beliefs in my model, where pessimism can be transmitted internationally via the confidence channel and cause contagion. 


After the outbreak of the COVID-19 pandemic, in the United States output recovered quickly, labor productivity went up above the pre-pandemic trend, and the labor market was tight, all despite high unemployment. I explain these stylized facts in a canonical search and matching model of unemployment with two additional assumptions: endogenous labor demand and the presence of coordination effects. The first assumption allows firms to adjust to recessions instead of shutting down. The second assumption introduces strategic complementarity in firm entry: the larger the number of firms, the larger the demand for varieties of intermediate goods, and the smaller firm size will become sufficient to justify costly entry. Two regimes arise endogenously: a regime with weak coordination effects and a regime with strong coordination effects. The regime with weak coordination effects describes the pre-pandemic era and the regime with strong coordination effects describes the post-pandemic period. Under strong coordination effects, when a job separation shock realizes, new firms find it easier to hire workers. As firms enter, they post vacancies, and the labor market becomes tight. Under strong coordination effects, the model also predicts the net creation of establishments, an increase in labor productivity and in producer prices, and a reduction in the average firm size in response to a job separation shock, as found in the post-pandemic data.


We study determinacy conditions in a neoclassical monetary model. In addition to inflation, we introduce a second argument of the interest rate rule: output, a case empirically relevant but mostly overlooked in the existing literature. Firstly, we estimate a model with money in utility and the production function. Our key finding is that to achieve determinacy, the central bank should maintain a fine balance between the stabilization of inflation and output and avoid focusing on one target only. Secondly, we compare monetary policy in the era before the appointment of Paul Volcker and after. We find that, in the post-Volcker era, monetary policy shifted its focus from output to inflation. The equilibrium is found indeterminate in both sub-samples due to an imbalanced approach to stabilization. Thirdly, we find that in the estimated model, monetary shocks, inflation shocks, and productivity shocks have long-lasting effects on inflation and output. We attribute this to endogenous persistence caused by indeterminacy. Lastly, we apply the results of our model to the post-pandemic monetary policy and discuss the implications.


Work in Progress