Working Papers
Insulation through Credibility: Navigating U.S. Monetary Spillovers
(Job Market Paper)
Abstract: Managing spillovers from U.S. monetary policy poses a key challenge for central banks around the world. I study how the credibility of a central bank to meet its inflation target shapes its exposure to U.S. monetary spillovers and the associated domestic policy trade-offs. Using daily asset-price event study regressions, I show that in economies with weaker credibility, short-term inflation and interest-rate expectations rise more strongly, while long-term inflation expectations are revised upward following a U.S. monetary tightening. I develop an open-economy New Keynesian model with imperfectly anchored long-term inflation expectations to rationalize these findings and highlight their macroeconomic implications. Under weak credibility, agents’ long-term inflation expectations are more responsive to realized inflation, which amplifies the inflationary spillovers of a U.S. monetary tightening and leads to a more severe inflation–output trade-off for domestic policymakers. Evidence from Bayesian vector autoregressions comparing economies with differing degrees of inflation-targeting credibility supports the model’s prediction that weaker credibility exacerbates the policy trade-off faced by central banks.
Friend, Not Foe? Monetary Policy and Energy Prices, with Alexander Kriwoluzky, Frederik Kurcz, and Ben Schumann
Abstract: In this paper, we first present a new empirical finding by showing that the European Central Bank’s monetary policy decisions significantly influence global energy prices. Through Lucas-critique-robust counterfactual analysis, we show that a central bank's ability to affect global energy prices strengthens the monetary transmission to inflation and alleviates the inflation-output tradeoff. We illustrate the relevance of these results by examining their role in the optimal policy response to an energy supply shock. Our estimates show that the ability of monetary policy to affect global energy prices halves the tightening necessary to stabilize inflation and mitigates the corresponding economic contraction.
Abstract: Fiscal policy packages typically comprise multiple instruments, including different spending components and forms of taxation. We move beyond aggregate measures to analyze how these specific instruments differ in their ability to stabilize the macroeconomy. We identify shocks to government consumption, government investment, income taxes, and consumption taxes in one model, using cross-sectional heteroskedasticity in a panel structural vector autoregression for euro area economies. All fiscal interventions are effective: expansionary shocks raise GDP significantly. Their efficiency is different: peak output multipliers are around 1.3 for both governement consumption and government investment, 0.4 for income taxes, and 0.3 for consumption taxes. Using the identified fiscal shocks, we trace the dynamic effects of each fiscal instrument on key macroeconomic variables. We find that increases in government consumption and investment raise inflation, while income and consumption tax cuts reduce it. As the nominal policy rate remains unchanged—consistent with a common monetary policy unresponsive to national fiscal shocks—these opposite inflation responses translate into diverging real interest rate paths, which help explain the observed differences in fiscal multipliers.
Collateral Policy Interventions and Financial Markets, with Pia Hüttl and Matthias Kaldorf
Abstract: Central bank collateral policy specifies which assets banks can pledge as collateral to obtain central bank funding. To study the systematic effects of central bank collateral policy on banks, financial markets, and asset prices, we propose a high-frequency approach to identify collateral policy surprises, using bank stock price changes around Eurosystem collateral policy announcements. Expansionary collateral policy surprises are associated with excess returns of bank stocks, a decline in several common volatility measures, and a decrease in bank CDS spreads. They also compress core-periphery government bond spreads, even for policy changes that are unrelated to the collateral treatment of government bonds. These findings indicate that collateral policy influences sovereign bond markets through an uneven transmission channel distinct from both asset purchases and conventional monetary policy. Lastly, we present a stylized intermediary asset pricing model that rationalizes our empirical findings on how collateral policy transmits to banks and sovereign bond markets.
Work in Progress
Financial Market Reactions to U.S. Fiscal News: Evidence from a Novel Daily News Database, with Nikhil Patel
(working paper available upon request)
Abstract: We construct a novel daily-frequency fiscal news database for the United States from a historical archive of news feeds that closely represent financial market participants’ real-time information set. Leveraging the archive’s granular coverage, we recover a fiscal policy surprise series to study how fiscal news transmits to the macro-financial environment. We find that expansionary fiscal news significantly increases long-term Treasury yields and term premia. These movements coincide with upward revisions in market-based inflation expectations and risk premia at both short and long horizons. By contrast, fiscal-uncertainty news induces a risk-off response, lowering yields and raising market volatility, underscoring the importance of distinguishing the information content of fiscal developments. We further assess the role of systematic monetary policy in shaping fiscal transmission to financial markets. Employing Lucas critique–robust empirical counterfactuals, we show that the monetary policy reaction to fiscal news shapes the responses of stock prices, the U.S. dollar and near-term inflation expectations. Finally, we document substantial spillovers of U.S. fiscal policy to international sovereign bond and equity markets.
Beyond Multipliers: Distributional Income Effects of Government Spending in the Euro Area, with Alexander Kriwoluzky, Melina Ludolph, Madalina Patru, and Lena Tonzer
Monetary Policy Surprises in the Euro Area, with Michael Bauer