Published Papers

Bounded Rationality, Monetary Policy, and Macroeconomic Stability

Joint work with Greta Meggiorini, Fabio Milani. 

Economics Letters 186 (2020): 108522

Abstract: This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes "cognitive discounting", i.e. consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy. 

Heterogeneous Expectations, Indeterminacy, and Postwar US Business Cycles

Joint work with Fabio Milani.

Journal of Macroeconomics 68 (2021)

Abstract: This paper estimates a New Keynesian model extended to include heterogeneous expectations, to revisit the evidence that postwar US macroeconomic data can be explained as the outcome of passive monetary policy, indeterminacy, and sunspot-driven fluctuations in the pre1979 sample, with a switch to active monetary policy and a determinate equilibrium starting in the early 1980s. Different shares of consumers and firms form either rational expectations, or adaptive and extrapolative expectations. The inclusion of heterogeneous expectations alters the determinacy properties of the model compared to the corresponding case under exclusively rational expectations. The Taylor principle is neither necessary nor sufficient, as the details of expectations may matter more for equilibrium stability. The model is estimated with Bayesian techniques, using rolling windows and allowing the parameters to fall both in the determinacy and indeterminacy regions. The estimates reveal large shares of agents who depart from rational expectations; heterogeneous expectations are preferred by the data everywhere in the sample. The results confirm that macroeconomic data in the early windows are better explained by indeterminacy, while determinacy is favored over the latest two decades. We uncover, however, some subsamples that include the 1980s and 1990s in which the Taylor principle is satisfied, but expectations becoming extrapolative raise the probability of indeterminacy to 50% and more.  

Anchoring Japanese Inflation Expectations

Joint work with Paul Cashin

Forthcoming IMF Working Paper

Abstract: This paper reviews the role of inflation expectations for the case of Japan. The key characteristics of inflation expectations are set out, in particular the expectation formation process for households and firms. Using a procedure outlined in recent Reserve Bank of New Zealand research, we investigate the movement of inflation expectations following changes in monetary policy in Japan via a Nelson-Siegel model. For robustness, we complement the analysis with further measures of anchored inflation expectations. Results show that while Japanese inflation expectations have not achieved the 2 percent target set by the Bank of Japan, there are signs of better anchoring of inflation expectations.

Working Papers

Trend Inflation Under Bounded Rationality 

Joint work with Greta Meggiorini

Abstract: This paper evaluates the implications of introducing bounded rationality in a New Keynesian model with trend inflation. In the canonical model, trend inflation generates macroeconomic instability by making the economy more susceptible to equilibrium indeterminacy. We find that cognitive discounting increases the region of determinacy, and therefore trend inflation becomes less destabilizing. We estimate the model using bayesian methods and allowing for both determinacy and indeterminacy, and find that the best fitting model features bounded rationality and a determinate equilibrium. 

Measuring the Effects of US Unconventional Monetary Policy on International Financial Markets 

Presented at the 2nd Workshop for Financial Econometrics and Empirical Modeling of Financial Markets, Institute for the World Economy, Kiel Germany - May 2018 and at the Society for Economic Dynamics Meetings in Mexico City, June 2018

Abstract: I estimate the effects of the US Federal Reserve's forward guidance and large-scale asset purchases on British, Canadian, Australian, Japanese, and German bond yields, stock indices, and exchange rates. I identify these two monetary policy factors as in Swanson (2018), and show that they have substantial effects on international bond yields, but these effects vary across countries and across maturities. I find small effects on exchange rates, and no significant effects on stock indices. To facilitate cross country analysis, I compute a spillover rate for each factor, and extend this to a larger panel of countries, yielding similar results. I conclude that there are significant spillover effects on international bond yields from US monetary policy across countries and maturities.