Publications
Financial shocks and inflation dynamics, joint with Sandra Eickmeier and Esteban Prieto (2021), published in Macroeconomic Dynamics
We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the “missing disinflation” during the Great Recession. We apply a Bayesian vector autoregressive model to US data and identify financial shocks through a combination of narrative and short-run sign restrictions. Our main finding is that contractionary financial shocks temporarily increase inflation. This result withstands a large battery of robustness checks. Negative financial shocks help therefore to explain why inflation did not drop more sharply in the aftermath of the financial crisis. Our analysis suggests that higher borrowing costs after negative financial shocks can account for the modest decrease in inflation after the financial crisis. A policy implication is that financial shocks act as supply-type shocks, moving output and inflation in opposite directions, thereby worsening the trade-off for a central bank with a dual mandate.
Monetary policy and the asset risk-taking channel with Dominik Thaler (2019), published in the Journal of Money Credit and Banking
How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks' incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show theoretically that this novel transmission channel generates a new monetary policy trade-off between inflation and real interest rate stabilization, whereby the central bank may prefer to tolerate greater inflation volatility in order to lower excessive risk taking.
Point, interval and density forecasts of exchange rates with time-varying parameter models joint with Massimiliano Marcellino, published in the Journal of Royal Statistical Society A
Modelling parameter time variation improves the point, interval and density forecasts of nine major exchange rates vis-a-vis the US dollar over the period 1976- 2015. We find that modelling parameter time variation is needed for an accurate calibration of forecast confidence intervals, and is better suited at long horizons and in high-volatility periods. The biggest forecast improvements are obtained by modelling time variation in the volatilities of the innovations, rather than in the slope parameters. We do not find evidence that parameter time variation helps to unravel exchange rate predictability by macroeconomic fundamentals. However, an economic evaluation of the different forecast models reveals that controlling for parameter time variation and macroeconomic fundamentals leads to higher portfolios returns, and to higher utility values for investors.
The Changing International Transmission of Financial Shocks: Evidence from a Classical Time-Varying FAVAR, joint with Sandra Eickmeier, Wolfgang Lemke, and Massimiliano Marcellino, published in the Journal of Money Credit and Banking
Replication Codes available on the Journal's website and on request
We study the changing international transmission of financial shocks over the period 1971–2012. Global financial shocks are measured as unexpected changes of a U.S. financial conditions index (FCI), developed by Hatzius et al. (2010). We model the FCI jointly with a large international data set through a time-varying parameter factor-augmented VAR and find that financial shocks have a considerable impact on growth in the nine countries considered. Moreover, financial shocks have become more important over time: They explain approximately 20% of GDP growth variation on average over 2008–09, compared to an average of 5% prior to the Global Financial Crisis.