Research

Abstract: The literature established that a sovereign bond’s “convenience yield” premium diminishes when that country issues more debt. But how is this convenience yield affected when another country issues sovereign debt? Using high-frequency identification and debt management offices’ communication, we find that an increase in German or French debt reduces convenience yields across the eurozone. Spillovers to low-risk countries are one-for-one while those to riskier countries are smaller. To rationalize these findings, we develop a model with heterogeneous credit risk. Safe sovereign bonds are close substitutes to hedge against idiosyncratic risk, explaining large spillovers, while risky bonds are poor substitutes.

Abstract: Cross-sectional designs that include time fixed effects to identify the impact of shocks are now widely used in empirical research. This includes the Phillips curve, where time fixed effects are used to absorb inflation expectations and supply shocks. However, we show the strategy fails three ways once units differ in their exposure to common forces: the slope is biased; the estimand is different; the reported standard errors shrink with the sample. An extension to interactive fixed effects addresses those issues provided that testable granularity conditions are met and slack is measured accurately. We supply such a measure: firms’ reported labor shortages, disaggregated at the euro area sub-sector and country level. The design typically used in the literature recovers a narrower, attenuated estimand, underestimating the micro-local slope to about one-third of its true value. 

Abstract: Does faster productivity growth reduce inflation, and what are the implications for monetary policy in the AI era? Drawing on a panel of 17 advanced economies from 1890 and across six different monetary regimes, we show that it does -- but that the resulting disinflationary effect is almost fully offset by a commensurate increase in the real interest rate, leaving the appropriate nominal policy rate roughly unchanged. These two effects persist over time and across different monetary regimes and are robust to a wide range of alternative specifications. Applied to the current AI debate, our estimates suggest neither preemptive monetary easing nor preemptive tightening: over the long run, the two channels largely offset each other.