Research

Abstract: We use the high-frequency, decentralized implementation of Stay-at-Home orders in the U.S. to disentangle the labor market effects of SAH orders from the general economic disruption wrought by the COVID-19 pandemic. We find that each week of SAH exposure increased a state's weekly initial unemployment insurance (UI) claims by 1.9% of its employment level relative to other states. A back-of-the-envelope calculation implies that, of the 17 million UI claims between March 14 and April 4, only 4 million were attributable to SAH orders. We present a currency union model to provide conditions for mapping this estimate to aggregate employment losses.

Abstract: We provide a guide to using autoregressive distributed lag models for impulse response estimations with an identified structural shock or an external instrument for the shock. We illustrate how specifications widely used in practice can lead to inconsistent and inefficient estimators. We further review empirical results from previous papers and show that some results appear to be statistical artifacts. We propose a simple method to avoid such a false conclusion from biases or large standard errors and obtain consistent and precise estimates.

Abstract: What are the implications of being surprised by inflation news? We answer this question by investigating how unexpected changes in inflation influence real economic activity. First, we construct inflation surprises as the difference between realized inflation and inflation forecasts made a few days before the CPI release date. Based on our inflation surprise series, we find that inflation surprises shift market expectations over a long horizon, subsequently affecting the real economy. Embedding inflation surprises into a structural VAR with sign restrictions, we find that inflation surprises have differential effects on real economic activities depending on how markets interpret them. When markets interpret inflation surprises as being predominantly driven by supply-side factors, real production, retail sales, investment decrease, and excess bond premia rise. Conversely, when inflation surprises are mostly driven by demand-side factors, real economic activity rises and excess bond premia decrease. Our identified surprises align with contemporary market commentary. Our results highlight the importance of understanding how economic agents interpret and respond to surprise changes in inflation, as their varying interpretations can have different implications for the real economy.

Abstract: How individual labor supply responds to changes in (expected) inflation? Traditional theories have mixed predictions on this question. Yet, no direct empirical evidence exists on the relationship between (expected) inflation and labor supply. We fill this gap by running an experiment in an online labor market, Amazon Mechanical Turk. By randomizing information treatment, we generate exogenous variation in subjective expectations about price and wage inflation, and unemployment. From this, we investigate how changes in expectation affect MTurk workers' reservation wages and the desired employment duration. We find that the resulting increase in wage inflation expectation significantly increases reservation wages. Higher expected price inflation rates, on the other hand, decrease reservation wages. Higher unemployment expectation increases the desired duration of employment and decreases reservation wages. Combining all, we find that wage-price spiral risks appear limited despite the record-high current price inflation rates.

Abstract: The costs of business cycles are not evenly distributed in the economy. Nevertheless, monetary policies have relied only on “aggregate” labor market variables, ignoring this heterogeneity in the incidence of economic fluctuations. How can monetary policy be more inclusive and benefit people who are more vulnerable to economic fluctuations? To shed light on this question, which is at the core of policy discussions, I study heterogeneity (“types”) in labor market arrangements and implications of this heterogeneity for welfare and optimal monetary policy. I document that the experiences of regular and irregular workers over the business cycle differ considerably. For example, the share of irregular workers in employment rises during recessions, suggesting that firms actively adjust labor composition over the business cycle. I develop a tractable New Keynesian model with regular and irregular labor types that reflect the cyclical nature of labor composition. I find that workers, who are marginally attached to either the regular or the irregular labor market, face larger volatilities in their consumption and disutility from labor supply and hence suffer larger welfare losses over the business cycle. I find that optimal monetary policy rule should react to employment dynamics in specific segments of the labor market than the overall stance of the labor market. When a central bank follows that rule, it benefits not only people who are more vulnerable to economic fluctuations but generate higher economy-wide welfare.

Abstract: Recent work suggests that when central bank releases information, they could alter expectations and spending in directions that potentially reverse the expected effect of policy changes. In this paper, we estimate the extent to which expectations changes depend on explicit information given by central banks. We compare impulse responses to high-frequency monetary policy surprises during announcements when the Bank of England also releases a detailed inflation report to those where a simple press statement is released. We find that when a simple press statement is released policy has conventional signs: output and inflation fall following a surprise tightening. However, when a detailed inflation report is released, surprise tightening raise GDP and inflation suggesting the information effect can be controlled by central banks.