Works in Progress

Inside Money, Employment, and the Nominal Rate

Job Market Paper

Most general equilibrium models of monetary policy do not simultaneously feature a real role for money and match expected empirical moments. This paper develops a flexible price business cycle model that can do both, and also help resolve several empirical puzzles. Inside money, specifically deposits provided by the private financial sector, are necessary for payments. The nominal interest rate summarizes the spread between the real return on money and the real return on safe debt, which is the cost of inside money. Monetary policy that reduces the provision of inside money by the private financial sector raises the nominal rate, which acts as a tax on consumption and employment, reducing real output. Because monetary policy works through the financial sector instead of acting on the money supply directly, contractionary shocks produce declines in inflation instead of “Fisherian” increases, the usual moment in Monetarist models. In a special case, the solution of the model closely corresponds to the Keynesian IS-LM model, with monetary and financial shocks shifting the “LM” curve. In an extension, I show that if firms must hire workers before knowing how productive they will be — a type of risk not included in most macroeconomic models — increases in risk are contractionary and deflationary, and correspond to shifts in the “IS” curve. I interpret monetary, financial, and risk shocks as flexible price aggregate demand shocks. 

[draft available here] [slides]

Direct Identification of the Fed Information Effect 

With David Miller, Federal Reserve Board 

Impulse responses estimated using monetary policy shocks identified with high frequency data suggest that the impact of monetary policy on key macroeconomic variables such as inflation and unemployment is sometimes opposite in sign to what standard models would predict or policymakers intend. One proposed explanation for these moments is the "Fed Information Effect" or the idea that surprise changes in Federal Reserve policy convey information to the market about the state of the economy that can, in the short term, dominate the impact of the policy change itself. We leverage a novel dataset to directly test for existence of the Federal Reserve information effect, by looking at changes in professional forecasts of macroeconomic data including CPI, unemployment, and GDP around FOMC announcements. Because forecasts are for data releases about periods entirely prior to the FOMC announcements we study, we can separate the effect of information from the effect of policy.  Our results support the idea that professional forecasters believe that the Federal Reserve has special information about the state of the economy. However, we do not find that this information uniformly reduces forecast error, which suggests that the market may overestimate the quality of Federal Reserve information. Our dataset also allows us to control for and study impact of other macroeconomic information, including other data releases, on forecasts. 

[draft coming soon]

Safe Assets, Portfolio Substitution, and the Optimal Quantity of Government Debt  

Presented at the Federal Reserve Board 

Financial crises that generate “flights to safety” are commonly understood to negatively impact the real economy by shifting resources away from productive investment. However, in general equilibrium models with safe debt and risky productive capital, increases in risk are normally expansionary, because the price of safe debt adjusts such that the precautionary motive dominates and leads to an increase in capital investment. I find that it is possible to generate a contractionary flight to safety in a heterogenous agent model with idiosyncratic risk when safe debt is government debt and the government partially accommodates investor demand. I show that this mechanism can quantitatively match some empirical movements in both prices and real output in response to uncertainty shocks. I also study adjustments to the quantity of government debt as a policy tool. I find that an increase in government provided safe assets crowds out private investment, lowering real output and average consumption, but also provides utility-increasing insurance to households, and that optimal policy maximizes the trade-off between the mean and variance of consumption.

[updated draft coming soon] [slides here]

Published papers

The U.S. Syndicated Loan Market: Matching Data

With Gregory J. Cohen,  Kamran Gupta, William Hayes, Seung Jung Lee, W. Blake Marsh, Nathan Mislang, Maya O. Shaton, and Martin Sicilian. Journal of Finanical Research, 2021. 

We introduce a new software package for determining linkages between datasets without common identifiers. We apply these methods to three datasets commonly used in academic research on syndicated lending: Refinitiv LPC DealScan, the Shared National Credit Database, and S&P Global Market Intelligence Compustat. We benchmark the results of our match using results from the literature and previously matched files that are publicly available. We find that the company level matching is enhanced by careful cleaning of the data and considering hierarchical relationships. For loan level matching, a tailored approach based on a good understanding of the data can be better in certain dimensions than a more pure machine learning approach. The R package for the company level match can be found on Github.

Other Projects

Risk and Misallocation: Can't invest or Won't invest? 

With Anuraag Aekka

A number of papers have documented that firm marginal revenue product of labor (MRPL) and marginal revenue product of capital (MRPK) appear more dispersed in developing than in developed countries, and that this "misallocation" of productive inputs is large enough to partially explain observed differences in total factor productivity (TFP). However, the sources of this misallocation remain unclear. One strand of literature focuses on the idea that, due to underdeveloped financial markets and a lack of access to working capital, firms in developing countries are constrained from reaching their desired size. This paper explores the idea that greater production risk —  for example due to more limited information, uncertain market access, or political instability — leads risk averse entrepreneurs in developing countries to optimally operate at smaller scales.  We aim to test alternative sources of misallocation in a general equilibrium heterogenous agent model. 

On hiatus. 

The Effect of Policy on Optimal Entrepreneurial Effort in a Lottery Model  

London School of Economics Master's thesis.