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Abstract: We study how uncertainty shocks affect the macroeconomy across the inflation cycle using a nonlinear stochastic volatility-in-mean VAR. When inflation is high, uncertainty shocks raise inflation and depress real activity more sharply. A nonlinear New Keynesian model with second-moment shocks and trend inflation explains this via an "inflation-uncertainty amplifier": the interaction between high trend inflation and firms’ upward price bias magnifies the effects of uncertainty by increasing price dispersion. An aggressive policy response can replicate the allocation achieved under standard policy when trend inflation is low.
Presentations:
Monetary Policy Shocks and Narrative Restrictions: Rules Matter!, with E. Castelnuovo and G. Pellegrino. Draft
Abstract: Restrictions on the policy coefficients in a vector autoregressive model can substantially sharpen the identification of monetary policy shocks achieved via narrative restrictions. We reach this conclusion by conducting extensive Monte Carlo simulations with a standard monetary policy model of the business cycle as our data generating process. We show that narrative restrictions dramatically improve the ability of (traditional) restrictions imposed on impulse responses to identify a monetary policy shock; restrictions on the policy rule coefficients improve identification even further. Working with US data, we show that policy coefficient restrictions imply a larger and more precisely estimated short-run response of output to a monetary policy shock than the one predicted by using only traditional and narrative restrictions. This happens because policy coefficient restrictions work in favor of shifting the burden of matching unconditional moments in the data from the systematic policy rule to monetary policy shocks. Working with Euro area data, we show that policy coefficient restrictions sharpen the identification of the contemporaneous response of the corporate bond spread to a monetary policy shock.
Sentiment Shocks, Stock Market Mispricing, and the Business Cycle, with Martin M. Andreasen and Giovanni Pellegrino [In progress]
Abstract: This paper investigates the effects of sentiment-driven shocks originating in the stock market on the business cycle. Using a daily VAR model identified through a combination of narrative sign restrictions and zero restrictions, we isolate sentiment shocks associated with major stock market jumps that lack fundamental explanations according to daily newspaper coverage, as per the classification by Baker, Bloom, Davis, and Sammon (2021 NBER WP No. 28687). Our analysis reveals that, historically, stock market mispricing — measured as deviations of actual prices from fundamental values — has been procyclical, peaking at +40% before the dot-com bubble burst and bottoming during the Great Recession. Controlling for uncertainty shocks, we confirm that sentiment shocks are distinct and have substantial effects on real economic activity, underscoring the role of belief-driven mispricing for business cycle fluctuations.
Asymmetric Asset Purchase Shocks: QE and QT in the EA, with Marcel Stechert [In progress]
The Rise of Superstars, Markup Fluctuations and Business Cycles, with Mark Weder [In progress]
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