Work in Progress
Work in Progress
Prices and Monetary Policy: The Role of Financial Constraints [Draft] [Riksbank WP] [SF Fed WP] [CEPR DP]
with Michael Bauer and Mathias Klein
Abstract. Firm heterogeneity in financial constraints is a quantitatively important driver of how monetary policy transmits to inflation. Using detailed microdata on Swedish public and private firms, and high-frequency monetary policy surprises around Riksbank announcements, we document that smaller, financially constrained firms adjust prices significantly less than larger firms in response to changes in monetary policy. This heterogeneous price response materially dampens the aggregate PPI inflation response to monetary policy. Models of customer markets and financial frictions can explain our findings: because the external finance premium rises after a monetary contraction, constrained firms cut prices less to preserve cash flows, sacrificing future market share. Additional evidence on heterogeneous sales, debt, marginal cost, and markup responses further supports this channel. We consider several alternative explanations, including differences in price adjustments, working capital, market share, and export share, but these cannot rationalize our main heterogeneity result.
The Trade Channel of Monetary Spillovers: Evidence from Swedish Producer Prices [Draft]
Abstract. I study the role of international trade in the transmission of foreign monetary policy to domestic firms' price-setting decisions. Using Swedish microdata on prices and trade exposure, I show that firms with a higher export share to the euro area set relatively higher prices following a contractionary euro area monetary policy shock. The differential response is stronger for domestic prices than for export prices. I find no significant difference in the price response of firms with a higher share of imported inputs from the euro area. These results are consistent with an increase in euro area demand for Swedish goods due to an appreciation of the euro against the Swedish krona. In support of this interpretation, I show that firms with a higher export share to the euro area face relatively higher export demand following the contractionary shock.
Financial Uncertainty, Macroeconomic Uncertainty, and the Business Cycle (Draft available upon request)
Abstract. I develop a dynamic stochastic general equilibrium model that matches the empirical results of Ludvigson et al. (2021) on the causal direction of uncertainty. Their results show that financial uncertainty is a cause of recessions, while macroeconomic uncertainty is a consequence of recessions. I show that a medium-scale New Keynesian model augmented with learning about unobserved productivity (endogenous macro uncertainty) and financial frictions with a second-moment shock affecting the severity of these frictions (exogenous financial uncertainty) can match their results. The model is parameterized using a combination of calibration and estimation by simulated method of moments to match business cycle moments from U.S. macro and financial data. Quantitatively, financial uncertainty has a large effect on economic activity and is an important driver of business cycle fluctuations, while endogenous macro uncertainty has a negligible effect and is not an important amplifier of business cycles.