Working Papers

De-anchored Inflation Expectations and Monetary Policy

This paper studies the conduct of monetary policy in a model with an endogenous degree of expectations anchoring. I use an estimated New Keynesian model with endogenous forecast switching to replicate the time-varying excess sensitivity of long-term inflation expectations to inflation surprises as well as the resulting movements of long- term inflation expectations. In this model, de-anchoring leads to increased inflation volatility and can cause deflationary spirals when the zero lower bound (ZLB) is binding. This can be prevented by an asymmetric monetary policy rule which responds more aggressively to below-target inflation. Price Level Targeting, on the other hand, can increase the risk of deflationary spirals near the ZLB.

(To be) Presented at: Canadian Economics Association Conference 2021, Annual Congress 2021 of the Swiss Society of Ecomnomics and Statistics, EcoMod 2021, MMF Annual Conference 2021, SIE Annual Conference 2021

Monetary Policy and Mergers & Acquisitions (with Wolfram Horn)

We analyse the effect of monetary policy on mergers and acquisitions (M&A) activity using transaction and balance sheet data of U.S. publicly listed companies. We confirm the predictions of a stylised model with frictional financial markets by showing that contractionary monetary policy significantly decreases M&A activity, especially for financially constrained firms. We furthermore investigate the effect of monetary policy on deal quality, measured as the abnormal stock returns for the acquiring firm. We find that contractionary monetary policy reduces beneficial capital reallocation by reducing M&A activity, but the marginal transaction is of higher quality as fewer constrained firms engage in M&A.

(To be) Presented at: International Panel Data Conference 2021, EcoMod 2021, 10th PhD Student Conference on International Macroeconomics, European Economics and Finance Society 2021 Annual Conference, VfS Annual Conference 2021, DGF Annual Conference 2021

Optimal Severity of Stress-test Scenarios (with Natalie Kessler)

Bank supervisors such as the Federal Reserve conduct regular stress tests to ensure stable lending. This constitutes a de facto constraint on balance sheets: equity must be sufficient to maintain current lending also tomorrow, even after absorbing severe loan losses. We study the effects of such forward looking constraints in a representative bank model. More severe stress tests scenarios lead to lower dividends, higher equity levels, and universally lower, albeit less volatile, lending. Subsequently, we calibrate our model to U.S. banks to compute the optimal, state-dependent severity of stress tests. Finally, we compare stress tests with several policy alternatives, such as the Covid-19 dividend ban, the counter-cyclical capital buffer (CCyB), and the dividend prudential target (DPT): while the first two perform well as complementary policies, a DPT is not welfare-improving for a supervisor seeking stable lending levels.

Presented at: Rapid Fire Session IWH March 2021, IWH Brownbag Seminar June 2021

Work in Progress

Firm Subsidiaries and the International Transmission of Monetary Policy