Research

JOB MARKET PAPER:

"Communication at the Zero Lower Bound: The Case for Forward Guidance" PDF

Keywords:  Delphic forward guidance; unanchored expectations; central bank communication; zero lower bound; adaptive learning; 

Forward guidance has become an integral part of the policy arsenal of central banks, yet its effectiveness was assumed to rely on the bank’s commitment to high future inflation. In this paper I show a novel mechanism which generates disagreement in interest rate forecasts between the central bank (CB) and the agents and calls for forward guidance as a communication device without any policy deviations.

The zero lower bound (ZLB) acts as an informational curtain for adaptively learning agents as they cannot observe the path of the hypothetical shadow rate. I prove analytically that this biases agents’ forecast upwards towards earlier lift-off, consistent with data from the FED, Swedish Riksbank and surveys. The disagreement coupled with the learning agents results in unanchored expectations and explosive dynamics. Forward guidance then restores stability at the ZLB by preventing spurious expectational drift. Thus, the paper calls for transparent communication by the CB in ZLB environments. Although such communication is welfare improving, no forward guidance puzzle is present.

"Experimental Evidence on Expectation Formation and Monetary Policy Communication" with Joep Lustenhouwer and Christian R. Proaño

Keywords: behavioral macroeconomics, monetary policy, central bank communication, zero lower bound, bounded rationality, economic literacy

We investigate by means of an online learning-to-forecast experiment (LtFE) the impact of interest rate information on expectation formation in normal times and in periods where the zero lower bound (ZLB) is binding. Through the variation of information about the monetary policy stance (i.e. the nominal interest rate and the hypothetical Taylor rate that would prevail if the ZLB would not exist), we investigate the role of central bank communication for expectation formation.

We discover important differences between economic experts and non-experts in their usage of the available information when forming aggregate forecasts. Non-experts do not react to interest rate information at all, while experts and semi-experts have less pessimistic expectations concerning output and inflation if they do not observe the nominal interest rate. Experts revise their expectations upwards when shown the shadow rate, while the other agents do not make use of that information. We build a heterogeneous beliefs model to study optimal monetary policy and communication.

"Optimal State-Contingent Forward Guidance" with Sebastian Diz

Keywords: optimal monetary policy, central bank communication, forward guidance, zero lower bound

Coming soon

"Policy Change and Forward Guidance" PDF

Keywords: forward guidance; adaptive learning; taylor rule; central bank communication; zero lower bound

This paper studies the effects of forward guidance (FG) from a novel perspective. Instead of considering FG as a promise for future actions (Odyssean) or providing better forecasting (Delphic), the Central Bank in the model is giving a signal about its own reaction function.

The Central Bank uses FG as a communication device to signal a policy change to the adaptively learning agents under the zero lower bound (ZLB). The main findings are that clear communication increases welfare compared to no communication. Nevertheless, if the message has been too vague and agents view it through the lens of past observations, forward guidance may be ineffective. Finally, the model is able to replicate some features of the data on private forecasts during the zero lower bound and forward guidance episodes.

"Returns to skill and Industrial Sorting"  PDF

Keywords: assortative matching; search and matching; misallocation; human capital; returns to skills; mincerian regression; PIAAC; OECD;

This paper studies the relationship between returns to skill and assortative matching among workers and industries in OECD countries. Using the OECD’s PIAAC cognitive skills dataset it shows that: returns to skill are systematically related to industrial sorting; high-skilled industries have more assortative matching of workers from all occupations; and more developed countries have less within- and cross-sectoral mismatch.

A two-sector 1-to-1 matching model is developed which allows for both types of mismatch due to search costs. The calibrated model exposes a novel tradeoff, namely that richer countries have tighter within-sectoral matching bands, but higher cross-sectoral mismatch for a given search cost. Thus, higher search frictions must be present in poorer countries to explain their higher levels of cross-mismatch in the data.

"The Impact of Corruption on FDI Inflows"  PDF

Bulgarian National Bank, PhD Scholarship Programme

Keywords: corruption, foreign direct investment, grease or sand in the wheels

This paper contributes to the literature studying the effects of corruption on economic prosperity by developing an analytical model for the effect of endogenous public funds embezzlement on foreign direct investments (FDI) in the domestic country. The main findings point to a "sanding" average effect of corruption on FDI inflows for countries with poor governance, yet to an average positive effect for countries at the high end of the governance efficiency scale. The results were also supported by the empirical rolling-window estimation. Additionally, corruption was found to be detrimental to FDI inflows over the entire sample, yet the results were very sensitive to the regression specification.