work in progress

Deconstructing Monetary Policy Surprises - The Role of Information Shocks, with Marek Jarocinski, June 2018, revision requested in AEJ:MacroeconomicsCEPR Discussion Paper 12765

Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components
and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions.

The Reanchoring Channel of QE: The ECB Asset Purchase Programme and Long-Term Inflation Expectations, with Philippe Andrade, Johannes Breckenfelder, Fiorella de Fiore and Oreste Tristani, October 2016, revision requested from International Journal of Central Banking; working paper version: The ECB's Asset Purchase Programme: An Early Assessment, ECB Working Paper No 1956.

This paper analyses the impact of the European Central Bank’s asset purchase programme on long-term inflation expectations. It documents that the announcements related to the launch of the programme have raised long-term inflation expectations towards the ECB’s medium-term inflation objective. It argues that such a ‘reanchoring channel’ can enhance the effectiveness of the programme, especially when the policy rate is stuck at its lower bound. The channel can account for a third of the programme’s inflation impact in a calibrated macroeconomic model with balance sheet constrained banks and uncertainty about the central bank’s inflation target.  

Cattle, Steaks, and Restaurants: Development Accounting when Space Matters, with Miklos Koren, July 2017

We introduce location choice in a multi-sector general equilibrium model to study how it affects development accounting. Producers in agriculture, manufacturing and services choose their location to trade off land rents with transport costs to the city center. We show how space affects the aggregate production function and decompose output per worker into productivity, land per worker, and a term adjusting for sector location. In our model, services are luxury goods. As a result, richer cities have larger service cores, higher service prices, and relatively less output per worker in services. These predictions are broadly consistent with the data. We calibrate our model to data on cities in OECD countries and show that land and location explain 10-30 percentage points of the variation in output per worker.

A Spatial Explanation for the Balassa-Samuelson Effect, with Miklos Koren, November 2008

We propose a simple spatial model to explain why the price level is higher in rich countries. There are two sectors: manufacturing, which is freely tradable, and non-tradable services, which have to locate near customers in big cities. As countries develop, total factor productivity increases simultaneously in both sectors. However, because services compete with the population for scarce land, labor productivity will grow slower in services than in manufacturing. Services become more expensive, and the aggregate price level becomes higher. The model hence provides a theoretical foundation for the Balassa-Samuelson assumption that productivity growth is slower in the non-tradable sector than in the tradable sector. Empirical results confirm two key implications of the theory. First, we compare countries where land is scarce (densely populated, highly urban countries) to rural countries. The Balassa-Samuelson effect is stronger among urban countries. Second, we compare sectors that locate at different distance to consumers. The Balassa-Samuelson effect is stronger within sectors that locate closer to consumers.

published papers 

Menu Costs, Aggregate Fluctuations, and Large Shocks, with Adam Reiff, July 2018, forthcoming in AEJ:MacroeconomicsCEPR Discussion Paper 10138

We document that the aggregate price level responds flexibly and asymmetrically to large positive and negative value-added tax changes. We present a price-setting model with menu costs, trend inflation and fat-tailed product-level shocks that is consistent with these observations. The model predicts a flexible price-level response to standard monetary policy shocks because it anticipates a large number of firms on the verge of price adjustment and far from their optimal prices when the shock hits.

 Monetary Policy Surprises, Credit Costs, and Economic Activity, with Mark Gertler, 2015, AEJ: Macroeconomics7(1): 44-76;  VoxEU; CEPR Discussion Paper 9824;  Data and code

We provide evidence on the nature of the monetary policy transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with those obtained in the standard monetary VAR analysis. We also find, however, that monetary policy responses typically produce "modest" movements in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the baseline model of monetary transmission. Finally, we show that forward guidance is important to the overall strength of policy transmission. 

Global Implications of National Unconventional Policies, with Luca Dedola and Giovanni Lombardo, 2013, Journal of Monetary Economics, 60(1): 66-85.

Financial integration in the markets for banks' assets and liabilities makes balance sheet constraints highly correlated across countries, resulting in a high degree of financial and macroeconomic interdependence. Likewise, under financial integration unconventional policies aimed at stabilizing domestic financial and credit conditions could entail large international spillovers. Therefore, stabilization by one country will also benefit other countries, reducing incentives to implement credit policies in a classic free-riding problem, especially when these policies entail domestic costs. We show that this outcome can emerge in an open economy model featuring financial intermediaries that face endogenously determined balance sheet constraints. 

QE1 vs. 2 vs. 3: A Framework to Analyze Large Scale Asset Purchases as a Monetary Policy Tool, with Mark GertlerInternational Journal of Central Banking, 9(S1): 5-53.

We introduce large scale asset purchases (LSAPs) as a monetary policy tool within a macroeconomic model. We allow for purchases of both long term government bonds and securities with some private risks. We argue that LSAPs should be thought of as central bank intermediation that can affect the economy to the extent there exist limits to arbitrage in private intermediation. We then build a model with limits to arbitrage in banking that vary countercyclically and where the frictions are greater for private securities than for government bonds. We use the framework to study the impact of LSAPs that have the broad features of the different quantitative easing (QE) programs the Federal Reserve pursued over the course of the crisis. We find that (i) LSAPs work in the model in a way mostly consistent with the evidence; (ii) purchases of securities with some private risk have stronger effects than purchases of government bonds; (iii) the effects of the LSAPs depend heavily on whether the zero lower bound is binding. Our model does not rely on the central bank having more efficient intermediations technology than the private sector: We assume the opposite. 

A Model of Unconventional Monetary Policy, with  Mark Gertler, 2011, Journal of Monetary Economics, 58(1): 17-34.

The paper develops a quantitative monetary DSGE model that allows for financial intermediaries that face endogenous balance sheet constraints. It uses the model to simulate a crisis that has some basic features of the current economic downturn. The model, then is used to quantitatively assess the effect of direct central bank intermediation of private lending, which is the essence of the unconventional monetary policy that the Federal Reserve has developed to combat the subprime crisis. It is shown numerically how central bank credit policy might help moderate the simulated crisis. Then the optimal degree of central bank credit intervention and the welfare gains are calculated in this scenario.

             sample code (updated)