Research

Long abstract: Is excessive risk-taking in credit cycles driven by incentives or biased beliefs? I propose a framework suggesting that the two are actually related and, specifically, that procyclical overoptimism can arise rationally from risk-taking incentives. I show that when firms and banks have a limited liability payoff structure, they have lower incentives to pay attention to the aggregate conditions that generate risk. This leads to systematic underestimation of the accumulation of risk during economic booms and overoptimistic beliefs. As a result, agents lend and borrow excessively, further increasing downside risk. Credit cycles driven by this new "uninformed" risk-taking are consistent with existing evidence such as high credit and low risk premia predicting a higher probability of crises and negative returns for banks. My model suggests that regulating incentives can decrease overoptimistic beliefs and thus mitigate boom-and-bust cycles.

Presented at: Society for Economic Dynamics (SED), Young Economist Symposium (YES), Green Line Macro Meeting (Boston College & Boston University), European Central Bank DGR, European Economic Association Congress (EEA), Ventotene Workshop in Macroeconomics,  Swiss Winter Conference on Financial Intermediation (poster), Theories and Method in Macro (T2M) 

Long abstract: We find evidence suggesting that surveys of professional forecasters are biased by strategic incentives. First, we find that individual forecasts overreact to idiosyncratic information but underreact to common information. Second, we show that this bias is not present in forecast data that is not subject to strategic incentives. We show that our evidence is consistent with a model of strategic diversification incentives in forecast reporting. Our results caution against the use of surveys of forecasts as a direct measure of expectations, as this would overestimate the likely deviations from rational expectations, the information precision, and the degree of disagreement.

Presented at: EEA- ESEM Conference, Inflation: Drivers and Dynamics (ECB & FED Cleveland)*, CEF conference,  Green Line Macro Meeting (Boston College & Boston University), ifo Conference on Macroeconomics and Survey Data (CESifo), BoC-FRBNY-ECB-Conference on Expectations Surveys*, Conference on Real-Time Data Analysis, Methods, and Applications, Workshop on Subjective Expectations, Theories and Methods in Macro (T2M)

Long abstract: Should exchange rate policy communication be transparent or intentionally opaque? We show that it depends on whether expectations depart from rationality. We develop a macroeconomic model in which agents overreact to their private information about fundamentals and use the exchange rate as a public signal to learn about the private information of others. In this environment, central bank communication surrounding foreign exchange (FX) interventions can influence the information content of the exchange rate and can be used to "manage expectations." While FX interventions that are publicly announced provide additional information about fundamentals, secret FX interventions instead alter the informational content of the exchange rate. If the overreaction bias is strong enough, it is optimal to intervene secretly to limit the informativeness of the exchange rate. Our model rationalizes observed practices in exchange rate policies such as managed floats and the opacity surrounding FX interventions.

Presented at: Society for Economic Dynamics (SED), Midwest Macro*, European Economic Association Congress (EEA), Theories and Methods in Macro*,  AMES Singapore*, European Summer Symposium on Financial Markets, West Coast Workshop in International Finance*, Federal Reserve Bank of New York*, International Monetary Fund*, Workshop on Macroeconomic Dynamics, CEPR Workshop on Central Bank Communication

Long abstract: We study the relationship between households' belief formation and uncertainty in the pre- and post-pandemic U.S. economy. We find that this relationship crucially depends on the source of uncertainty, in line with the predictions of a broad class of belief-updating models. In particular, we document a decline in belief rigidity at the pandemic's onset, driven by consumers' desire to seek new information to navigate a more uncertain economic landscape, and partly by the lockdown policies lowering information gathering costs. Moreover, we document an increase in belief rigidity in the subsequent period of high inflation, driven by a deterioration in the accuracy of new information, further increasing uncertainty. We show that this opposite impact of uncertainty sources on belief rigidity implies an opposite effect on the Phillips Curve slope, and therefore different macroeconomic implications.  

Long abstract: I show that information choice can explain the puzzling positive relation between bilateral investment and trade across countries. I present a model of endogenous information with both investment in assets and income from trade. While standard model of risk-hedging would require agents to invest in non-trading countries to diversify income risk, I show that limited information capacity and preferences for early resolution of uncertainty reverse this result. The intuition is that investors collect more information on trading partners to reduce income uncertainty, and therefore perceive their equity as less risky. I find that allowing for information choice reduces the role of risk hedging on portfolio decisions. I test my model’s implied relation between trade and attention in the data and find robust empirical support.