Job Market Paper

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

Working Papers

Monetary Policy and Mergers & Acquisitions (with Wolfram Horn)

We analyse the effect of monetary policy on mergers and acquisitions (M&A) activity in the United States, exploiting aggregate data as well as detailed information on M&A transactions and the financial statements of U.S. publicly listed companies. We find that aggregate M&A activity decreases significantly in response to an increase in interest rates. We confirm this result on the firm level: the probability that a given firm in our sample announces the acquisition of another firm, its “acquisition likelihood”, decreases significantly following an interest rate increase. The acquisition likelihood falls significantly more for relatively more financially constrained firms, suggesting a strong role for a credit channel of monetary policy transmission to firms’ M&A decisions. M&A transactions are, on average, associated with positive abnormal returns for the acquiring firm, suggesting that expansionary monetary policy can facilitate beneficial capital reallocation by enabling more M&A activity. At the margin, however, expansionary monetary policy leads to lower average abnormal returns as more constrained firms engage in M&A. We rationalise these findings in a stylised partial-equilibrium model.

(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

Work in Progress

Bank Reactions to Stress-Test Constraints (with Natalie Kessler)

Bank stress tests rely on current loan exposures to simulate the future equity capital levels under severely adverse economic conditions and restrict dividends, whenever a violation of the regulatory minimum equity-to-asset ratio is anticipated. We study the effect of such stress-test constraints on banks’ dividend policies and lending activities over the business cycle. First, we propose a three-period model that highlights that such constraints lead to lower dividends in high return states, higher dividends in low return states, but universally lower loan levels. Subsequently, we quantify the degree of asset shrinkage in an enriched dynamic partial equilibrium framework. We conclude by empirically testing the predictions derived throughout the paper, using Federal Reserve stress test and bank holding company data.

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