Job Market Paper

The Forward Premium Anomaly: Overlapping Generations, Multiple Equilibria, and Shocks to Beliefs. Available here

Uncovered interest parity states that the carry trade should deliver zero profit, on average. The data robustly reject this hypothesis in a large sample of countries: high interest rate currencies earn excess returns at short horizons and negative excess returns at longer horizons. I rationalize this observation in a two-country overlapping generations model with complete markets that features multiple dynamic equilibria. Because newborns cannot make decisions about consumption and savings before they are born, there is a set of self-fulfilling beliefs of the currently alive generations about the decisions of the future newborns. I utilize the multiplicity of dynamic equilibria by imposing a structure on the formation of beliefs. Beliefs are self-fulfilling, and shocks to these beliefs generate a large and volatile risk premium that is correlated with the interest rate differential. Changes in uncertainty about beliefs cause a reversal of expected excess returns associated with the current interest differential, similar to the reversal found in the data. I provide empirical evidence in favor of my mechanism and show that persistence of past expectations can account for most of the observed deviation from uncovered interest parity.


Animal Spirits in a Monetary Model, joint with R. Farmer. Forthcoming in European Economic Review (Accepted subject to minor revisions). Available here

We propose a fresh way of thinking about the monetary transmission mechanism. By integrating Keynesian economics with general equilibrium theory in a new way, we provide an alternative model and an alternative narrative to New-Keynesian economics to explain how macroeconomic policy inuences prices and employment. We develop a simple graphical apparatus, the IS-LM-NAC framework, that can be used by policy makers to understand how policy aects the economy. A new element, the NAC curve, connects the interest rate to current and expected future values of the stock market and it explains how `animal spirits' inuence economic activity. Our framework provides a rich new approach to policy analysis that explains the short-run and long-run effects of policy, without the assumption that prices are prevented from moving by articial barriers to price adjustment.

Working Paper

Confidence Crashes and Stagnation in the Eurozone

I build a model of the Eurozone crisis. I study a two-country model of a monetary union in which agents form self-fullfiling beliefs about asset prices. We show that downward revisions of beliefs about the value of assets cause international financial contagion, stagnation in real economic activity and permanently high rates of unemployment. The economy does not have a tendency to self-recover without improvement in beliefs. We achieve these results by leaving the labor market equilibrium indeterminate. I resolve indeterminacy by introducing a belief function as a new fundamental. The analysis suggests that if the eurozone stagnation is not a deviation from the trend, policy aimed at recovering the eurozone needs to trigger optimistic beliefs about the value of assets.