Research

Work in progress:

  • Firm Turnover and Inflation Dynamics, download paper, download presentation slides, poster

(previously Firm Turnover, Financial Friction and Inflation)

Abstract: I augment a New-Keynesian DSGE model with endogenous entry and exogenous stochastic exit and estimate with the Bayesian full information approach for the US economy. Shocks to the entry cost explain half of the inflation variance at the business cycle frequencies. When it is cheap to create firms, the number of new firms goes up and inflation increases as labour intensive creation of firms pushes up the demand for labour. Gradually, when the number of firms is high and the firm creation goes down again, does inflation fall, as stressed by the standard mechanism for an increasing number of firms.

Selected recent publications:

Abstract: Habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass-through to international prices. Deep habits generate a dynamic import demand function that leads to import price markup adjustments, independently of nominal pricing frictions. Augmenting a standard New Keynesian two-country model with deep habits, we obtain low exchange rate pass-through to import prices even when local currency prices are relatively flexible. As prices become more rigid, the presence of deep habits decelerates the pass-through of exchange rate fluctuations. Without deep habits, the model requires implausibly high degrees of price stickiness to match the pass-through dynamics triggered by an identified exchange rate shock in a vector autoregression.

(previously Limited Participation or Sticky Prices? New Evidence from Firm Entry and Failures, 2009, Bank of Estonia working papers 2008-07, download)

Abstract: An expansionary monetary policy shock increases the number of firms in the economy. A pure sticky price model predicts that the number of firms in the economy should go down after a monetary expansion, but this stands in contrast to the empirical findings. The cost channel mechanism produces an increase in the number of firms that is consistent with the data. A key insight is that the stronger price stickiness is, the stronger the cost channel needs to be to generate firm dynamics consistent with the data.

  • The Euro Exchange Rate During the European Sovereign Debt Crisis - Dancing to its own Tune?, joint with Michael Ehrmann (Bank of Canada), Chiara Osbat (European Central Bank) and Jan Stráský (OECD), Journal of International Money and Finance, December 2014, vol. 49B:319-339 (download)

Earlier versions: European Central Bank working paper no 1532, (download), Bank of Estonia working paper no 3 (download)

Abstract: This paper studies the determinants of the euro exchange rate volatility during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility increased in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions.

Media coverage:

- Bloomberg: Euro Resilient Amdi Doubts of Turmoil as Dire: Cutting Research

- Les Echos: Les politiques entretiennent la nervosité de l'euro (in French)

- Centralbanking.com: ECB research finds exchange rate decoupled from fundamentals

- Estonian Public Broadcasting: Eesti pangas tutvustati täna kahte uuringut (in Estonian)

  • Euro Area Monetary Policy Transmission in Estonia, joint with Gertrud Errit, Baltic Journal of Economics (download), 2014, vol. 14(1-2): 55-77

Earliner version: Bank of Estonia working paper no 7, (download)

Abstract: This paper studies the effect of a monetary policy shock in the euro area on the main Estonian economic and financial variables between 2000 and 2012. Using a standard structural vector autoregression (SVAR) model we find strong and persistent effects on Estonian GDP, private consumption, corporate investment and imports. A monetary policy shock has also strong and sluggish effects on the housing loan and consumer credit interest rates. The estimated reaction of Estonian GDP and the GDP deflator-based inflation rate is about four times stronger than the reaction of euro area-wide aggregates. The Estonian money market interest rate (the 3-month Talibor) reacts about twice as strongly as the euro area money market interest rate (the 3-month Euribor). We also show that this finding is sensitive to the inclusion of the data from the years of the recent financial and economic crisis. We conjecture that household interest rates can play an important role in propagating monetary policy shocks in Estonia.

Earlier versions: Economics Working Papers ECO2008/40, European University Institute (download), and CEPR Discussion Papers 7128 (download), and a new version (download) with a few typos corrected

Abstract> We introduce deep habits into a sticky-price sticky-wage economy and examine the resulting models ability to account for the impact of monetary policy shocks. The deep habits mechanism gives rise to countercyclical markup movements even when prices are flexible and interacts with nominal rigidities in interesting ways. Key parameters are estimated using a limited information approach. The deep habits model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for both the price puzzle and inflation persistence. A key insight is that the deep habits mechanism and nominal rigidities are complementary: the deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. The results are shown to be stable over time and not caused by monetary policy changes.

  • Liquidity and productivity shocks: A look at sectoral firm creation, 2009, published in Microfoundations of Economic Success: Lessons from Estonia, David G. Mayes (editor), Edward Elgar

Earlier version: Bank of Estonia working paper 2008-05 (download)

  • Principles of Wage Formation in Estonian Enterprises, 2009, with Tairi Rõõm, published in Microfoundations of Economic Success: Lessons from Estonia, David G. Mayes (editor), Edward Elgar