Bond-Stock Comovements, with John Campbell and Luis Viceira, 2025

- in preparation for Annual Review of Financial Economics -  

This paper documents that during the late 20th Century, nominal government bonds and stocks tended to comove positively, whereas during the first quarter of the 21st Century they have tended to comove negatively.  A similar sign switch is observable for real government bonds and breakeven inflation rates.  Recent macroeconomic events have caused short-lived changes in these comovements, and periods with high risk premia tend to be periods in which bond-stock comovements are large in absolute value.  The paper surveys theoretical models of these phenomena.

Inflation and Treasury Convenience, with Anna Cieslak and Wenhao Li, 2025

- revise and resubmit Journal of Finance - supported by NSF grant 2149193 - BFI Summary - SSRN Link

Using a century of data, we show that Treasury convenience yield and inflation comove positively during the inflationary second half of the 20th century, but negatively pre-WWII and post-2000. An inflation decomposition reveals that higher supply inflation predicts higher convenience, while lower demand inflation follows higher Treasury convenience. In our model, inflationary cost-push shocks raise the opportunity cost of holding money and money-like assets, inducing higher convenience. Conversely, liquidity demand shocks drive up convenience but lower consumption demand and inflation in the model. An estimated version of our model matches the changing inflation-convenience relationship in the data and shows that liquidity demand shocks dominated pre-WWII and post-2000, but supply shocks prevailed in the second half of the 20th century.

Global Hegemony and Exorbitant Privilege, with Pierre Yared, 2025

- BFI Summary - FAZ (in German) 

We present a dynamic two-country model in which military spending, geopolitical dominance, and government bond prices are jointly determined. The model reflects three facts: hegemons enjoy a funding advantage, this advantage rises with geopolitical tensions, and war losers devalue their debts more. In the model, greater bond revenue enables military investment, in turn increasing the safety value of bonds to international investors. Debt capacity strengthens the hegemon’s military and financial advantage but introduces steady-state multiplicity and fragility. With intermediate capacity, initial conditions determine the hegemon. However, with high capacity, self-fulfilling bond market expectations can trigger hegemonic transitions and geopolitical fragility.

A Model of Politics and the Central Bank, with Wioletta Dziuda, 2025

We develop a model of the interaction between an independent central bank and a government seeking to win elections. We find that a hawkish central bank increases the incumbent’s chance of reelection. This leads governments to prefer more inflation-averse central bankers than is socially optimal, rationalizing the political success of inflation targeting. The incumbent's preference for an inflation-averse central bank arises from a desire to improve economic outcomes conditional on being re-elected, but to worsen them conditional on losing the election. The political selection implies that a hawkish central bank leads to higher but less volatile unemployment. Consistent with the model, panel evidence from developed countries shows incumbents are more likely to be re-elected when central banks adopt a single inflation mandate or when executives hold appointment powers over central bank governors.