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 pass-through of inflation surprises to 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 implies an optimal inflation response that is significantly higher when expectations are endogenously anchored compared to rational expectations. Price Level Targeting, on the other hand, can increase the risk of deflationary spirals near the ZLB.
Monetary Policy and Mergers & Acquisitions (with Wolfram Horn)
We analyze the effect of monetary policy on mergers and acquisitions (M&A) activity using transaction and balance sheet data of public U.S. companies. We provide causal evidence that contractionary monetary policy reduces M&A activity. This effect is particularly pronounced for financially constrained firms, leading to a change in the composition of firms conducting M&A. As a result, contractionary monetary policy increases the quality of deals taking place as fewer financially constrained firms engage in M&A. Finally, following a mon- etary tightening, acquirers match with relatively smaller and younger target firms. In terms of profitability, however, monetary policy does not affect the matching between firms.
Optimal Severity of Stress-test Scenarios (with Natalie Kessler)
Bank stress tests, regularly conducted to ensure stable lending, constitute a de facto constraint on balance sheets: equity must be sufficient to maintain current lending also in the future, even after absorbing severe loan losses. We study the effects of such forward looking constraints in a representative bank model. More severe stress-test scenarios lead to lower dividends, higher equity levels, and universally lower, albeit less volatile, lending. We calibrate our model to large U.S. banks, subject to Federal Reserve stress tests, and compute the optimal, state-dependent severity of stress tests and implied capital buffers (up to 6% during normal times). Finally, we complement stress tests with three macro-prudential policies: the Covid-19 dividend ban, the counter- cyclical capital buffer (CCyB), and the proposed dividend prudential target (DPT). We find that combing stress tests with a dividend ban or DPT improves supervisor welfare equally. Due to its discontinuous nature, however, relaxing the CCyB falls short.