My research is mostly on macroeconomics, in particular monetary economics and applied econometrics. I am interested in the macroeconomic consequences of monetary policy decisions and the communication of policy makers. 

Policy Publications

The macroeconomic effects of Riksbank asset purchases during the pandemic: simulations using a DSGE model (joint with Carl-Johan Belfrage, Paola Di Casola, Ingvar Strid) Sveriges Riksbank Staff Memo, February 2023

GDP development in Sweden relative to other countries in the wake of Covid-19 (joint with Carl-Johan Belfrage, Paola Di Casola, Vesna Corbo)  Sveriges Riksbank Economic Commentary, June 2020

Working Papers

Effects of foreign and domestic central bank government bond purchases in a small open economy DSGE model: Evidence from Sweden before and during the coronavirus pandemic (joint with Carl-Johan Belfrage, Paola Di Casola, Ingvar Strid), Sveriges Riksbank Working Paper N. 421 

 This paper evaluates the macroeconomic effects of foreign and domestic central bank government bond purchases on the Swedish economy before and during the Corona pandemic using a small open economy DSGE model with segmented asset markets. In this model, the effects of foreign and domestic quantitative easing on the Swedish economy occur mainly through the exchange rate channel. The calibrated model is able to broadly capture the movements in foreign and domestic bond yields, capital flows and the Krona exchange rate associated with QE since the global financial crisis in 2007-2009. We find that foreign quantitative easing strengthened the Krona exchange rate and had modestly negative effects on Swedish GDP and inflation. Domestic QE, on the other hand, depreciated the Krona and had modestly positive macroeconomic effects. In 2015-2019 the government bond purchases on average depreciated the Krona by 2.5 percent, increased GDP by 0.2 percent, and increased inflation by 0.2 percentage points. The government bond purchases following the pandemic, which were more limited in size, had roughly half of these effects.

Research-In-Progress

The Uncertainty of Interest Rates as a Monetary Policy Instrument [pdf]

Central banks use forward guidance to affect the long-term interest rates and stimulate the economy. Given that central banks at times, such as now, provide explicit numerical guidance and reduce the uncertainty around the policy rate, and at other times be vague about the path of the interest rates, a scholarly study of the effects of changing monetary policy variance was needed. In this paper I provided an analytical understanding of the effects of changing policy interest rate volatility.

First I showed that monetary policy announcements affect the uncertainty around the expected policy rate by using the implied volatility measure calculated from Eurodollar Options. Then I analyzed the effects of changing uncertainty about interest rate path on real economy. To fulfill this aim, I used a closed economy dynamic New Keynesian model as a starting point since it provides a micro founded and tractable framework. Then, I analyzed the question in a two-country New Keynesian model with incomplete international asset markets where we can look into the effects of uncertainty about interest rate path on capital flows and exchange rate. The results showed that a decrease in the uncertainty of interest rates is expansionary in its own right, independent of the level of interest rates the central bank commits to. Thus, distinct from the literature, a new channel for the effectiveness of forward guidance is suggested.

Forward Guidance and Asset Prices (joint with Refet Gürkaynak, Burçin Kısacıkoğlu and Jonathan Wright) [pdf]

As an empirical test of the abovementioned uncertainty channel, we conduct an event-study exercise in which we break out FOMC announcements into surprises concerning the future path of the funds rate, and uncertainty around that path, and then estimate the impacts of each on equity and currency markets. We also examine the effects of forward guidance at the zero lower bound on the term structure of interest rates in a shadow-rate macro-finance term structure model. The effects on the yield curve are found to depend on the type of forward guidance and on the current level of the shadow rate. Our model allows us to estimate the effects of forward guidance on the expected path of policy and term premia separately. 

Interest Rate Bounds and Unit Roots (joint with Burak Eroglu) 

In this study, we analyze the interest rate dynamics of various countries, which follow an interest rate corridor mechanism. This mechanism consequently introduces upper and lower bounds for interest rate series. In this case, the inference using standard methods may become invalid since it is a well documented fact that the presence of bounds causes over-rejection of null hypothesis of unit root in standard tests (Cavaliere and Xu (2014)), However, bounds are not the only issue in interest rate corridor. Because of the changes in the monetary policy over time, interest rates are exposed to structural breaks. Taking these problems into consideration at the same time, we investigate the interest rate dynamics in Canada, UK, New Zealand, Sweden, Turkey and US. All of these series are bounded inside a corridor and they contain structural breaks. Applying the test proposed by Carrion-I-Silvestre and Gadea (2015), we conclude that interest rates of Turkey and New Zealand seem to be integrated inside policy bounds. This result changes when we apply usual unit root tests that only consider structural breaks. Interest rates of other countries appear to be stable.

Detecting Liquidity Traps (joint with Paolo Bonomolo and Ingvar Strid)

We work on the generalization of the seminal work of Villani (2009) on steady-state priors for vector autoregressions. We extend the simple steady-state BVAR with time varying steady states and a Markov switching regime between two states, namely a good state where the inflation and real rate are positive, and a bad state where the economy is in the liquidity trap following Benhabib, Schmitt-Grohe, Uribe (2002). Then we apply this algorithm to the Sweden, and Euro Area to test whether they are in danger to fall in a liquidity trap.

Publications

“Current account deficit, budget balance, financial stability, and monetary policy: Reflections on a gripping episode” with Refet Gürkaynak, Iktisat Isletme ve Finans, 2012, 27, 93-119 [pdf]

 “A Study on Sequential Internet Auctions Using Agent Based Modeling Approach”   PICMET 2009 Conference Proceedings [pdf]

Header Image Credits: NASA, ESA, CSA, Greg Bacon (STScI)