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Promoted to Economic Policy Advisor, Research Department, Federal Reserve Bank of Dallas, January 2024–present
Member of the Scientific Committee of the 29th International Conference Computing in Economics and Finance, Université Côte d’Azur, Nice (France), July 3-6, 2023
Member of the Scientific Committee of the Fall 2022 Midwest Macroeconomics Meetings (MMM), Southern Methodist University, Dallas (Texas), November 11-13, 2022
Co-chair Local Organizing Committee, 28th International Conference Computing in Economics and Finance, Southern Methodist University-Federal Reserve Bank of Dallas, Dallas (Texas), June 17-19, 2022
Guest Editor, Special Issue of the ECONOMÍA Journal: Recent Developments in Inflation Dynamics (July 2022)
Co-director of the International Housing Observatory, March 2019-present
Elected Member of the Advisory Council of the Society for Computational Economics (SCE), June 2018–June 2021
New Publications
Globalization and Monetary Policy
"Forecasting Inflation in Open Economies: What Can a NOEM Model Do?" (with Roberto Duncan), Journal of Forecasting, Vol. 42 (3), pp. 481–513, March 2023. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 235, April 2015 (Revised: December 2022)
This paper also circulated as: "Forecasting Local Inflation with Global Inflation: When Economic Theory Meets the Facts" (with Roberto Duncan), Globalization and Monetary Policy Institute Working Paper no. 235, April 2015
A background paper with supplementary materials appeared as Globalization and Monetary Policy Institute Working Paper no. 235a, December 2022
"The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model" (with Stephen J. Cole), Macroeconomic Dynamics, Vol. 27 (2), pp. 532-570, March 2023. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 375, November 2019 (Revision: March 2021)
Video presentation of the paper 'The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model', Ft. Lauderdale (FL), November 29, 2019
"Flexible Average Inflation Targeting: How Much Is U.S. Monetary Policy Changing?" (with Jarod Coulter and Roberto Duncan), Economía, Vol. 45 (89), pp. 102-149, August 2022. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 417, July 2022
"Introduction to Special Issue 2022-1: Recent Developments in Inflation Dynamics" (with Roberto Duncan), Economía, Vol. 45(89), August 2022.
"Monetary Policy and Economic Performance since the Financial Crisis" (with Dario Caldara, Etienne Gagnon, and Christopher J. Neely), Federal Reserve Bank of St. Louis Review, 103(4), Fourth Quarter 2021, pp. 425-460. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 397, August 2020
This paper also circulated as: "Monetary Policy and Economic Performance since the Financial Crisis" (with Dario Caldara, Etienne Gagnon, and Christopher J. Neely), Finance and Economics Discussion Series 2020-065. Washington: Board of Governors of the Federal Reserve
The analysis in this paper was presented to the Federal Open Market Committee as background for its discussion of the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. The Committee discussed issues related to the review at five consecutive meetings from July 2019 to January 2020. References to the FOMC’s current framework for monetary policy refer to the framework articulated in the Statement on Longer-Run Goals and Monetary Policy Strategy first issued in January 2012 and reaffirmed each January, most recently in January 2019. The conclusions and revision to the Federal Reserve's Monetary Policy Framework were announced by Chair Powell at the Jackson Hole Symposium on August 26, 2020: https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm
Related blog post: "Fed’s New Inflation Targeting Policy Seeks to Maintain Well-Anchored Expectations" (with Jarod Coulter and Valerie Grossman), Dallas Fed Economics Blog, April 6, 2021
"In No Uncertain Terms: The Effect of Uncertainty on Credit Frictions and Monetary Policy" (with Nathan S. Balke and Zheng Zeng), Economic Modelling, Vol. 100, July 2021. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 317, June 2017 (Revised: February 2021)
A background paper with supplementary materials appeared as Globalization and Monetary Policy Institute Working Paper no. 317a, June 2017 (Revised: February 2021)
"Policymakers’ Response to COVID-19 Can Draw on Great Recession Lessons" (with Jarod Coulter), Dallas Fed Economics Blog, July 7, 2020
An article that covers this research: "Credit Market Frictions, Business Cycles, and Monetary Policy: The Research Contributions of Charles Carlstrom and Timothy Fuerst" (by Todd Clark, Matthias Paustian, and Eric Sims), Economic Commentary (Federal Reserve Bank of Cleveland), March 25, 2020
"Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest," Economic Modelling, Vol. 100, July 2021. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 403, October 2020 (Revised: February 2021)
A background paper with the derivations of the model and supplementary results appeared as Globalization and Monetary Policy Institute Working Paper no. 403app, October 2020 (Revised: February 2021)
"Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies" (with Valerie Grossman, Mark A. Wynne, and Ren Zhang), Journal of International Money and Finance, Vol. 113, May 2021 (lead article in this issue, available online since January 2, 2021). A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 359, April 2019
Video presentation of the paper 'Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies', Federal Reserve Bank of Dallas, April 24, 2019
"Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve" (with Ayse Kabukcuoglu Dur), Journal of Economic Dynamics and Control, Vol. 117, 2020. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 392, June 2020
A background paper with the derivations of the model and supplementary results appeared as Globalization and Monetary Policy Institute Working Paper no. 392app, June 2020
An earlier version of this paper circulated as: "What Helps Forecast U.S. Inflation? - Mind the Gap!" (with Ayse Kabukcuoglu), Koç University-TUSIAD Economic Research Forum Working Papers No. 1615, December 2016
"New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment" (with Roberto Duncan), International Journal of Forecasting, Vol. 35(3), pp. 1008-1031, 2019. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 388, January 2018
Video presentation of the paper 'New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment', Federal Reserve Bank of Dallas, March 14, 2018
"As Good as a Random Walk: Inflation Forecasting in Emerging Market Economies" (with Roberto Duncan), VoxEU, June 8, 2018
"Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism," Computational Economics, Vol. 54(1), pp. 419-454, 2019. A longer working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 321, July 2017
Read coverage of this work from the Wall Street Journal and the Dallas Morning News (September 6, 2017)
"Modeling Time-Variation Over the Business Cycle (1960-2017): An International Perspective," Studies in Nonlinear Dynamics & Econometrics, Vol. 22(5), 2018. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 348, October 2018
SUERF Policy Note, Issue No. 71 (May 16, 2019)
LinkedIn post (April 5, 2019)
Econbrowser post (October 18, 2018)
International Trade
"El valor económico del español en Estados Unidos: Oportunidades y retos para el futuro" (with María Teresa Martínez-García), Estudios del Observatorio / Observatorio Studies, 78, pp. 1-50, June 28, 2022.
"The Economic Value of Spanish in the United States: Opportunities and Challenges for the Future" (with María Teresa Martínez-García), Estudios del Observatorio / Observatorio Studies, 78, pp. 1-48, June 28, 2022.
House Prices
"Explosive Dynamics in House Prices? An Exploration of Financial Market Spillovers in Housing Markets Around the World" (with Valerie Grossman), Journal of International Money and Finance, Vol. 101(March), 2020. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 342, July 2018 (Revised September 2018)
Read coverage of this work from the Wall Street Journal (January 27, 2020)
"Drilling Down: The Impact of Oil Price Shocks on Housing Prices" (with Valerie Grossman, Luis Bernardo Torres, and Yongzhi Sun), The Energy Journal, Vol. 40(SI1), 2019. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 369, September 2019
"Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices" (with Efthymios Pavlidis and Valerie Grossman), Economic Modelling, Vol. 80(August), pp. 87-102, 2019. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 325, July 2017
exuber: Econometric Analysis of Explosive Time Series (R package with Kostas Vasilopoulos and Efthymios Pavlidis) and intro to exuber (with Kostas Vasilopoulos, Efthymios Pavlidis, and Simon Spavound)
Video presentation of the paper 'Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices' (with Valerie Grossman), Federal Reserve Bank of Dallas, August 18, 2017
Read coverage of this work from Bloomberg (October 19, 2017)
Methodological Contributions
"exuber: Recursive Right-Tailed Unit Root Testing with R" (with Kostas Vasilopoulos and Efthymios Pavlidis), Journal of Statistical Software, Vol. 103(10), pp. 1-26, 2022. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 383, May 2020 (Revision: October 2021)
Software: exuber: Econometric Analysis of Explosive Time Series (R package with Kostas Vasilopoulos and Efthymios Pavlidis) and intro to exuber (with Kostas Vasilopoulos, Efthymios Pavlidis, and Simon Spavound)
"A Generalized Time Iteration Method for Solving Dynamic Optimization Problems with Occasionally Binding Constraints" (with Ayse Kabukcuoglu Dur), Computational Economics, Vol. 58(2), pp. 435-460, 2021. A working paper version of this article appeared as Globalization and Monetary Policy Institute Working Paper no. 396, August 2020
An earlier version of this paper circulated as: "The Market Resources Method for Solving Dynamic Optimization Problems" (with Ayse Kabukcuoglu), Globalization and Monetary Policy Institute Working Paper no. 274, June 2016
Recent Media Coverage, Current Analysis
Media Coverage
Media coverage of "Disparate Supply-Side Forces Gave U.S. Economy an Edge" (with Braden Strackman) from Central Banking
Media coverage of "Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble" (with Jarod Coulter, Valerie Grossman, Peter C.B. Phillips, and Shuping Shi) from CNN, CBS, Sunday Today with Willie Geist (NBC), NPR, Bloomberg, Fortune here and here, USA Today, Dallas Morning News, Forbes, CGTN, Yahoo Finance here and here, Housing Wire Daily, Allsides, Seeking Alpha, local news (Salt Lake City here and here, Nashville, Jacksonville), and Youtube (here, here, here, here, here, here, here, here, here, here, and here, among others) (March/April, 2022)
Media coverage of "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun" (with Efthymios Pavlidis, Alisa Yusupova, Ivan Paya, David Peel, Adrienne Mack and Valerie Grossman) from Financial Times (August 1, 2021)
"¿Que cómo saldremos de esta? Veamos: piense usted en un bar...," (interview by Finn E. Kydland on our joint work on productivity), Diario La Vanguardia, April 15, 2020
Media coverage of "Explosive Dynamics in House Prices? An Exploration of Financial Market Spillovers in Housing Markets Around the World" (with Valerie Grossman) from the Wall Street Journal (January 27, 2020)
Media coverage of "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun" (with Efthymios Pavlidis, Alisa Yusupova, Ivan Paya, David Peel, Adrienne Mack and Valerie Grossman) from Betterdwelling.com (October 17, 2017)
Media coverage of "Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices" (with Efthymios Pavlidis and Valerie Grossman) from Bloomberg (October 19, 2017)
Media coverage of "Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism" from the Wall Street Journal and the Dallas Morning News (September 6, 2017)
"España Necesita una Visión de Futuro," (interview by Finn E. Kydland on our joint work on productivity), Diario La Rioja, June 12, 2017
"Mantener la Relación entre España y Reino Unido va a ser Crucial para Alicante," (interviewed by Sol Giménez), Diario Información, 19 de Marzo de 2017 (pdf)
Current Analysis
"Disparate Supply-Side Forces Gave U.S. Economy an Edge" (with Braden Strackman), Dallas Fed Economics Blog, March 26, 2024
Media and online coverage: Central Banking
"Gazing at R-star: Gauging U.S. Monetary Policy Via the Natural Rate of Interest," Dallas Fed Economics Blog, July 3, 2023
"Monetary Policy at a Crossroads: Donald Kohn on Controlling Inflation, Ukraine Effects, Volcker-Era Lessons," Dallas Fed Economics Blog, July 5, 2022
"Russia’s War on Ukraine Will Leave Scars on U.S., World Economies" (with Jarod Coulter), Dallas Fed Economics Blog, May 17, 2022
"Exploring the Economics of Russia's War with Ukraine in One Minute", Video Update, March 29, 2022
"Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble" (with Jarod Coulter, Valerie Grossman, Peter C.B. Phillips, and Shuping Shi), Dallas Fed Economics Blog, March 29, 2022
Media and online coverage (some of it anyway): CNN, CBS, Sunday Today with Willie Geist (NBC), NPR, Bloomberg, Fortune here and here, USA Today, Dallas Morning News, Forbes, CGTN, Yahoo Finance here and here, Housing Wire Daily, Allsides, Seeking Alpha, local news (Salt Lake City here and here, Nashville, Jacksonville), and Youtube (here, here, here, here, here, here, here, here, here, here, and here, among others).
"Interest Rate Expectations Shape the Federal Reserve’s Path of Lift-off" (with Rachel Doehr), VoxEU, March 6, 2022
"Taking the Global Housing Market’s Temperature: Is It Running a Fever (Again)?" (with Jarod Coulter, Valerie Grossman, Efthymios Pavlidis, Kostas Vasilopoulos, and Iván Payá), Dallas Fed Economics Blog, September 28, 2021
"Spanish-Speaking Growth in Texas Reinforces Need to Close Education Gaps" (with María Teresa Martínez-García, Jarod Coulter, and Valerie Grossman), Dallas Fed Economics Blog, August 3, 2021
"Se Habla Español: U.S. Yet to Realize Many Benefits of a Growing Bilingual Population" (with María Teresa Martínez-García, Jarod Coulter, and Valerie Grossman), Dallas Fed Economics Blog, July 13, 2021
Virtual Seminar for the Instituto Cervantes's Observatory at Harvard University, December 2, 2021 (Video, Presentation and Replication Files)
IEO/IMF (Independent Evaluation Office of the International Monetary Fund) Virtual Seminar June 24, 2021: "The Global Real Estate Boom: Is it Time to Worry Again?"
"Fed’s New Inflation Targeting Policy Seeks to Maintain Well-Anchored Expectations" (with Jarod Coulter and Valerie Grossman), Dallas Fed Economics Blog, April 6, 2021
"COVID-19 Risks Expose Vulnerabilities, Downside Risks to U.S. Outlook" (with Jarod Coulter), Dallas Fed Economics Blog, March 2, 2021
Read coverage of this work from Business Insider (March 3, 2021)
criticalmention.com video (March 4, 2021)
"Systemic Risks, Interdependencies Weigh on 2021 Global Outlook" (with Jarod Coulter), Dallas Fed Economics Blog, February 16, 2021
"Policymakers’ Response to COVID-19 Can Draw on Great Recession Lessons" (with Jarod Coulter), Dallas Fed Economics Blog, July 7, 2020
"Private Forecasters’ COVID-19 Global Growth Outlook Takes Shape," Dallas Fed Economics Blog, May 5, 2020
Econbrowser post (May 6, 2020)
"Room to Grow: Housing for a New Economy", IMF's Global Housing Watch Newsletter, March 2020
Re-posted as a LinkedIn article
""Españoles por el Mundo": Evolución y Determinantes (2002-2019)," Boletín del Colegio Oficial de Doctores y Licenciados en Filosofía y Letras y en Ciencias Núm. 284 (Junio-Julio 2019)
"Rethinking the Trade-offs for Monetary Policy in an Era of Globalization", SUERF Policy Note, Issue No. 71, May 16, 2019
"Global Outlook for 2019-20: Global Growth Forecasts Shift Downward—What’s Behind the Numbers and Why It Matters," Econbrowser post, April 8, 2019
"Modeling Time-Variation Over the Business Cycle (1960-2017): An International Perspective," Econbrowser post, October 18, 2018
"As Good as a Random Walk: Inflation Forecasting in Emerging Market Economies" (with Roberto Duncan), VoxEU, June 8, 2018
"Go Figure: Texas Home Prices Head Through the Roof" (with Valerie Grossman), Federal Reserve Bank of Dallas Southwest Economy, Vol. 18, No. 01, First Quarter 2018
"Homing in on Housing Affordability Around the World" (with Valerie Grossman), Presentation at Finding Shelter: Affordability Squeeze in a Tight Texas Housing Market, Conference Sponsored by the Federal Reserve Bank of Dallas and the Real Estate Center at Texas A&M, February 23, 2018
"Global Growth Outlook Reflects Sustained Recovery" (with Arthur Hinojosa), Federal Reserve Bank of Dallas International Economic Update, February 6, 2018
"Oil Change: Fueling Housing and Land Prices?" (with Valerie Grossman, Yongzhi Sun, and Luis B. Torres), Journal of the Real Estate Center at Texas A&M University Tierra Grande, Vol. 24, October 2017
"Firmer Global Growth Hinges on Policy Shifts, Political Clarity" (with Valerie Grossman), Federal Reserve Bank of Dallas International Economic Update, March 17, 2017
"Global Growth Remains Restrained, Policy Uncertainty Heightens" (with Kelvinder Virdi), Federal Reserve Bank of Dallas International Economic Update, February 6, 2017
"Global and Local Housing Markets: The View From Experts at the Dallas FED," (with Valerie Grossman), interviewed by Hites Ahir, IMF's Global Housing Watch Newsletter, August 2016
New Working Papers
Globalization and Monetary Policy
"On the Nexus of Monetary Policy and Financial Stability: Novel Asset Market Monitoring Tools for Building Economic Resilience and Mitigating Financial Risks" (with Valerie Grossman and Lauren Spits), Globalization and Monetary Policy Institute Working Paper no. 421, June 2023
Abstract: In this note we argue that asset pricing bubbles are an important source of financial instabilities. First, the literature has tended to overlook bubbles and their consequences under the premise that they are hard to detect in real time. We suggest that novel statistical techniques allow us to overcome those prejudices as they provide valuable signals of emerging exuberance in real‐time. Second, monetary policy has been slow to recognize that financial instability arising from bubbles can have adverse effects on the transmission mechanism of monetary policy itself and on the types of risks faced by policymakers. We argue that measuring and monitoring episodes of exuberance in housing—but also in other asset classes—can be useful not just for thinking about macroprudential strategies but also to conduct risk analysis for monetary policy.
"The Contribution of Foreign Holdings of U.S. Treasury Securities to the U.S. Long-Term Interest Rate" (with Yixiang Zhang), SSRN Working Paper no. 3495790, November 2019
Abstract: We find robust empirical evidence of a structural break on the relationship between the foreign holdings of U.S. Treasury notes and bonds and the U.S. long-term interest rate likely occurring as monetary policy became constrained at the zero lower bound (ZLB) at the end of 2008. We argue that this can best be modelled in nonlinear form—based on a simple threshold single-equation error correction model with the federal funds rate as the threshold variable—which endogenously splits the sample into pre-ZLB and the ZLB regimes. Furthermore, we find that the estimated marginal effect of the foreign holdings ratio on the U.S. long-term interest rate is larger in absolute value during the ZLB regime than in the pre-ZLB regime, especially its long-run effect. Using the shadow federal funds rate derived from a Tobit-IV model, we find no significant structural break. Therefore, we argue that the ZLB is a leading cause of the perceived structural change. We take into account the concurrent impact of the Federal Reserve’s purchases of Treasury securities through a counterfactual assuming no Quantitative Easing (QE) interventions after 2008. Our results suggest that the three rounds of QE may have lowered the long-term interest rate by 38 to 55 basis points on average. We also find that changes in China’s holdings of U.S. Treasury notes and bonds played an important role in explaining the 2004-2006 interest rate conundrum and kept the long-term interest rate from going ever lower in the recent ZLB period.
(For code and dataset files, contact the author.)
Business Cycle Dynamics and Monetary Policy
"Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis" (with Stephen J. Cole and Eric R. Sims), Globalization and Monetary Policy Institute Working Paper no. 424, September 2023
A version of this paper appeared as NBER working paper no. 31777, October 2023
Abstract: This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the overall effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19.
(For code and dataset files, contact the author.)
"Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound" (with Rachel Doehr), Globalization and Monetary Policy Institute Working Paper no. 412, November 2021
Abstract: We propose a TVP-VAR with stochastic volatility for the unemployment rate, core inflation and the federal funds rate augmented with survey-based interest rate expectations and uncertainty and a FAVAR with a wider set of observable variables and alternative monetary policy measures in order to explore U.S. monetary policy, accounting for the zero lower bound. We find that a rise in monetary policy uncertainty increases unemployment and lowers core inflation; the effects on unemployment in particular are robust (a gradual 0.4 percentage point increase), lasting more than two years after the initial shock. Interest rate uncertainty shocks explain a significant portion of macro fluctuations, particularly after the 2007-09 global financial crisis contributing to push the unemployment rate one percentage point higher during the early phase of the subsequent recovery. Furthermore, we find that higher interest rate uncertainty makes forward guidance shocks (but also federal funds rate shocks) less effective at moving unemployment and core inflation. We also posit a theoretical model to provide the structural backbone for our empirical results, via an “option value” channel. Theory yields sizeable real effects and a muted monetary policy transmission mechanism as firms choose to postpone investment decisions in response to heightened interest rate uncertainty.
(For code and dataset files, contact the author.)
"Checking the Path Towards Recovery from the COVID-19 Isolation Response" (with Finn E. Kydland), Globalization and Monetary Policy Institute Working Paper no. 384, May 2020
Abstract: This paper examines the impact of the behavioral changes and governments' responses to the spread of the COVID-19 pandemic using a unique dataset of daily private forecasters' expectations on a sample of 32 emerging and advanced economies from January 1 till April 13, 2020. We document three important lessons from the data: First, there is evidence of a relation between the stringency of the policy interventions and the health outcomes consistent with slowing down the spread of the pandemic. Second, we find robust evidence that private forecasters have come to anticipate a sizeable contraction in economic activity followed by a check mark recovery as a result of the governments' increasingly stringent response. The evidence suggests also that workplace restrictions have further contributed to the downturn and to the subsequent sluggish recovery--opening up the question about the costs of tighter work restrictions. Finally, we argue inflation expectations have not changed significantly so far. Through the lens of the neoclassical growth model, these changes in macro expectations can result from the resulting work disruptions and the potential productivity slowdown from the gradual de-escalation of the confinement.
Video of the presentation of 'Checking the Path Towards Recovery from the COVID-19 Isolation Response', Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, Australian National University, July 9, 2020
(For code and dataset files, contact the author.)
"Monetary Policy Expectations and Economic Fluctuations at the Zero Lower Bound" (with Rachel Doehr), Globalization and Monetary Policy Institute Working Paper no. 240, May 2015 (Revised: November 2021)
Abstract: We propose a recursive VAR model augmented with survey-based measures of future interest rates to identify the effects of forward guidance on the U.S. economy. Our results show that when interest rates are away from the zero lower bound (ZLB), an exogenous shift in the perception toward higher future interest rates leads to an increase in current economic activity. However, when policy rates fall to the ZLB, economic activity decreases following an upward revision to expected future interest rates. These findings are robust to alternative estimation frameworks, identification schemes and data sources. We also provide a structural interpretation for our findings in the context of the workhorse New Keynesian model with news shocks about future monetary policy (forward guidance). In this setting, the monetary authority cannot accommodate the anticipatory effects from higher future interest rates while at the ZLB, which drags economic activity today. In turn, away from the ZLB, there is policy room to cut rates and revert the negative economic impacts of the anticipated policy. Similarly, announcing future lower interest rates while keeping interest rates at the ZLB today boosts current economic activity while the reverse can happen if, instead, policy rates are lifted above the ZLB to cool down the nascent expansion. Therefore, our empirical results and theoretical insights suggest that managing monetary policy expectations is a useful policy tool for stimulating economic activity, but its transmission mechanism is different at and away from the ZLB.
Read coverage of this work from The Atlantic magazine (June 14, 2016)
Videoblog (February 16, 2022)
(For code and dataset files, contact the author.)
Inflation Dynamics and Globalization
"Just Do IT? An Assessment of Inflation Targeting in a Global Comparative Case Study" (with Roberto Duncan and Patricia Toledo)
Abstract: This paper proposes new measures of the effectiveness of inflation targeting (IT) and evaluates its main drivers using synthetic control methods in a (large) sample of advanced economies (AEs) and emerging market and developing economies (EMDEs). First, we confirm that IT has heterogeneous effects on the inflation rate across countries. The gains in lower inflation are modest and smaller in AEs than are those in EMDEs. All such gains are statistically significant only in one out of three economies. Second, statistically significant differences in keeping inflation close to target under IT (compared with estimated counterfactuals) can be detected more broadly in nearly half of the economies. Third, IT can be a source of economic resilience, helping cushion inflation fluctuations during a severe crisis like the 2007-09 Global Financial Crisis. However, our results indicate little causal effects. Finally, IT effectiveness—measured by the dynamic treatment effect—is significantly correlated with proxies of central bank independence. Among AEs, policy formulation attributions of the central bank play an important role. In contrast, the central bank’s ability on lending to the public sector is the relevant covariate for EMDEs.
(For code and dataset files, contact the author.)
Methodological Contributions
"A Matter of Perspective: Mapping Linear Rational Expectations Models into Finite-Order VAR Form," Globalization and Monetary Policy Institute Working Paper no. 389, May 2020
Abstract: This paper considers the characterization of the reduced-form solution of a large class of linear rational expectations models. I show that under certain conditions, if a solution exists and is unique, it can be cast in finite-order VAR form. I also investigate the conditions for the VAR form to be stationary with a well-defined residual variance-covariance matrix in equilibrium, for the shocks to be recoverable, and for local identification of the structural parameters for estimation from the sample likelihood. An application to the workhorse New Keynesian model with accompanying Matlab codes illustrates the practical use of the finite-order VAR representation. In particular, I argue that the identification of monetary policy shocks based on structural VARs can be more closely aligned with theory using the finite-order VAR form of the model solution characterized in this paper.
"Finite-Order VAR Representation of Linear Rational Expectations Models: With Some Lessons for Monetary Policy," Globalization and Monetary Policy Institute Working Paper no. 285, September 2016 (Revised: August 2018)
Supplementary materials (SSRN WP #3279250): "Finite-Order VAR Representation of Linear Rational Expectations Models: In a Nutshell"