Research

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:

• Annual Conference of the International Association for Applied Econometrics (IAAE 2023), Oslo. Slides

• 31st Symposium of the Society for Nonlinear Dynamics & Econometrics (SNDE 2024), Padova. Slides

Abstract: Imposing restrictions on policy rule coefficients in vector autoregressive (VAR) models sharpens the identification of monetary policy shocks obtained with sign and narrative restrictions. We demonstrate this claim through extensive Monte Carlo simulations, showing that policy coefficient restrictions, combined with narrative restrictions, reduce the distance between the VAR-estimated impulse response of output and its true counterpart. The contribution of policy coefficient restrictions is particularly important when the volatility of monetary policy shocks is consistent with empirical estimates (i.e., not implausibly large) and the number of narrative restrictions is low. Using US data, we find that adding policy coefficient restrictions yields a larger and more precise short-run output response, along with more stable Phillips multiplier estimates.