Research Interests

Time Series Econometrics, Macroeconomics, Monetary Policy

Policy Rules and Macro Stabilization: Measuring the Effectiveness of Systematic Monetary Policy (in progress)

with David Worms

Abstract: How much does systematic monetary policy stabilize the economy? We answer this question by estimating how structural shocks in the US would have propagated in the absence of the Federal Reserve's endogenous policy response. Using robust policy counterfactuals, we combine responses to a battery of non-policy shocks with empirically identified innovations to the current and expected future path of monetary policy. We find that systematic monetary policy substantially changes shock propagation, but its effects are clearly shock-specific. Following adverse demand shocks, the endogenous policy response dampens fluctuations in both economic activity and inflation. In the case of adverse supply shocks, by contrast, monetary policy attenuates the contraction in real activity while intensifying associated inflationary pressures, thereby revealing a pronounced inflation-activity stabilization trade-off. We further find that the historical policy response is closely approximated by a Taylor-type feedback rule, while alternative policy regimes deliver only limited additional stabilization within the empirically identified policy space.

On the Empirical Relevance of the Exchange Rate as a Shock Absorber at the Zero Lower Bound (2026)

with Mathias Hoffmann and Patrick Hürtgen,  European Economic Review,  190, 105494.

Abstract: The New Keynesian argument is that flexible exchange rate regimes cannot stabilize cyclical developments at the ZLB, as the real exchange rate appreciates in response to adverse demand shocks. We estimate the effects of a negative domestic demand shock on the real exchange rate for the euro area vis-à-vis the United States, Canada, and Japan by state-dependent sign-restricted local projection methods. We find a real depreciation when interest rates are not at the ZLB, but also when they are. The exchange rate can accommodate considerable variations in output, confirming its shock-absorbing capacity away and during ZLB episodes. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECB’s balance sheet at the ZLB, while it remained unaffected in the non-ZLB period. 

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The Inflationary Effects of Global Supply Chain Shocks: Evidence from Swedish Microdata (2026)

with Mathias Klein and Peter Tillmann, European Economic Review, 189, 105426.

Abstract: We compile a unique dataset linking micro price data underlying the official Swedish producer price index with administrative firm level data and provide new evidence on the inflationary effects of global supply chain shocks. For identification, we interact exogenous shocks to global supply chains, obtained through a VAR model, with firmspecific import shares. Shocks to global supply chains lead to a significant and persistent increase in producer prices with a peak response after two years. Importantly, average responses mask heterogeneous responses across firms. Relatively larger firms, firms with lower labor costs and a higher market share raise prices more strongly. 

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The Macroeconomic Effects of Global Supply Chain Disruptions (2023)

with Peter Tillmann

Abstract: Highly interconnected global supply chains make countries vulnerable to supply chain disruptions. This paper estimates the macroeconomic effects of global supply chain shocks for the euro area. Our empirical model combines business cycle variables with data from international container trade. Using a novel identification scheme, we augment conventional sign restrictions on the impulse responses by narrative information about three episodes: the Tōhoku earthquake in 2011, the Suez Canal obstruction in 2021, and the Shanghai backlog in 2022. We show that a global supply chain shock causes a drop in euro area real economic activity and a strong increase in consumer prices. Over a horizon of one year, the global supply chain shock explains about 30% of inflation dynamics. We also use regional data on supply chain pressure to isolate shocks originating in China. Our results show that supply chain disruptions originating in China are an important driver for unexpected movements in industrial production, while disruptions originating outside China are an especially important driver for the dynamics of consumer prices.

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Forward Guidance under the Cost Channel (2022, revised)

Abstract: This paper analyzes how the cost channel of monetary policy affects the credibility of forward guidance. A cost channel is present when firms' marginal costs depend on the nominal rate of interest. As a result, there is a supply-side effect of monetary policy. We analyze the power of forward guidance using a calibrated New Keynesian model  and compare our results to the standard New Keynesian model. We find that, compared to a standard New Keynesian model, the cost channel (i) makes forward guidance more powerful by reducing welfare losses at the zero lower bound, (ii) the central bank's best strategy requires a  shorter forward guidance horizon, (iii) the strength of the cost channel plays an important role, and (iv) ignoring the cost channel is costly in terms of steady-state consumption.

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Robust Optimal Monetary Policy under Heterogeneous Beliefs (2022, revised)

Abstract: We use a New Keynesian model that features rational and non-rational households. Assuming that both the fraction of rational households and the expectations formation process are uncertain from the perspective of the central bank, we derive robust optimal monetary policy in a simple min-max framework where the central bank plays a zero-sum game versus a fictitious, malevolent evil agent. We show that the central bank is able to improve welfare compared to the outcome under discretion if it accounts for uncertainty while the model is being distorted. Even if the central bank accounts for the worst possible outcome while the model is being distorted, it is shown that the central bank can still reduce the welfare loss by implying a more "aggressive" targeting rule that favorably affects the inflation-output stabilization tradeoff.

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Do Credit Supply Shocks Have Asymmetric Effects? (2022)

with Paul Rudel, Empirical Economics, 64(4), 1559-1597.

Abstract: They do. Partly. We identify credit supply shocks via sign restrictions in a Bayesian VAR and separate them into positive and negative. Using local projections, we find that positive credit supply shocks leave notably different prints in private debt, mortgage debt, and debt-to-GDP, as opposed to negative credit supply shocks. This pattern is caused by the response of household mortgage debt. Furthermore, we find evidence that positive credit supply shocks are the driving force behind boom-bust cycles. Yet, developments behind the boom-bust cycle cannot explain the strong and persistent response in debt; but house prices tend to. However, if we abstract from potential asymmetries, we get rather mild results, which underestimate the true effects of credit supply shocks.

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Pandemic Shocks and Household Spending (2021)

with Peter Tillmann, Oxford Bulletin of Economics and Statistics, 84(2), 273-299.

Abstract: We study the response of daily household spending to the surprise number of fatalities of the COVID-19 pandemic, which we label as a pandemic shock. Based on daily forecasts of the number of fatalities, we construct the surprise component as the difference between the actual and the expected number of deaths. We allow for state-dependent effects of the shock depending on the position on the curve of infections. Spending falls after the shock and is particularly sensitive to the shock when the number of new infections is strongly increasing. If the number of infections grows moderately, the drop in spending is smaller. We also estimate the effect of the shock across income quartiles. In each state, low-income households exhibit a significantly larger drop in consumption than high-income households. Thus, consumption inequality increases after a pandemic shock. Our results hold for the US economy and the key US states. The findings remain unchanged if we choose alternative variables to separate regimes.

[pdf], [appendix]

The Role of Global and Domestic Shocks for Inflation Dynamics: Evidence from Asia (2021)

with Peter Tillmann, Oxford Bulletin of Economics and Statistics, 84(5), 1181-1205.

Abstract: This paper studies inflation dynamics and the output-inflation trade-off in small open economies. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks explain large parts of inflation and output dynamics. A series of counterfactuals support these findings and suggest that the role of monetary policy is limited. We estimate reduced-form Phillips curve regressions based on alternative decompositions of output into global and domestic components. For most countries, we find a positive and significant correlation between inflation and the fraction of GDP driven by domestic shocks only. While including the output component driven by oil prices seems to 'flatten' the Phillips curve, though the effect is not significant, the component driven by global demand shocks 'steepens' the inflation-output nexus.

[pdf], [appendix]

Mortgage Debt and Time-Varying Monetary Policy Transmission (2023)

with Jörg Schmidt and Peter Tillmann,  Macroeconomic Dynamics, 27(2), 506-531. 

Abstract: This paper studies the role of monetary policy for the dynamics of U.S. mortgage debt, which accounts for the largest part of household debt. A time-varying parameter VAR model allows us to study the variation in the mortgage debt sensitivity to monetary policy. We find that an identically-sized policy shock became less effective over time. We use a DSGE model to show that a fall in the share of adjustable-rate mortgages (ARMs) can replicate this finding. Calibrating the model to the drop in the ARM share since the 1980s yields a decline in the sensitivity of housing debt to monetary policy which is quantitatively similar to the VAR results. A sacrifice ratio for mortgage debt reveals that a policy tightening directed towards reducing household debt became more expensive in terms of a loss in employment. Counterfactuals show that this result cannot be attributed to changes in monetary policy itself.

[pdf], [appendix]

Has Monetary Policy Really Become Less Effective in the Euro Area? A Note (2018)

Applied Economics Letters, 26(13), 1087-1091.

Abstract: This paper applies a time-varying VAR model with stochastic volatility to the euro area. In contrast to the literature, we find that (i) monetary policy has not become less effective and that (ii) the expansionary policy that is currently pursued would not have resulted in a less severe recession in 2009.

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