Bartels, Maren (2024): "Monetary Policy and the Information Effect Under Macroeconomic Uncertainty", Job Market Paper.

Abstract: This paper employs state-dependent local projections to explore the impact of monetary policy shocks on the U.S. economy, carefully distinguishing between periods of low and high macroeconomic uncertainty. A key aspect of this analysis is the decomposition into two components of monetary surprises: the pure monetary policy component and the central bank information component, as identified by Jarocinski and Karadi (2020) from high-frequency surprises around Federal Open Market Committee meetings. Previous studies found a reduced effectiveness of monetary policy shocks under conditions of heightened uncertainty, a result this paper corroborates for interest rate surprises overall. However, the key finding and novel insight presented here is that the information component is the primary driver behind this diminished effectiveness. The results indicate that the economy reacts more strongly to positive information shocks when uncertainty is high, thereby reducing the overall impact of contractionary monetary policy shocks. These findings challenge a key policy recommendation in the literature which is to change interest rates more aggressively in uncertain times. Instead, central banks should exploit the economy’s heightened sensitivity to the information component and account for it in their communication.

Bartels, Maren, Johannes Binwanger, Albert Flak, and Manuel Oechslin (2024): "A Macroeconomy with Intuitive Thinkers", Working Paper.

Abstract: A growing body of evidence shows that, when forming expectations, households, firms, and even experts often deviate from rational expectations, adhering to intuitive models about macroeconomic relationships that conflict with actual experience. The "stagflationary'' intuitive model -- high output comes with low inflation -- is a prominent example. Starting with a linear difference model à la Blanchard and Kahn (1980), we develop a generic macroeconomic framework in which expectations emerge from an interplay of two mental systems. A rigorous thinking system forms expectations corresponding to standard rational expectations. An intuitive system forms expectations based on associative memory, perturbing rational expectations. As a result, households behave as if they were subject to cognitive discounting, and autonomous innovations in intuitive expectations are a source of macroeconomic fluctuations. We illustrate the tractability of the framework by applying it to stagflationary expectations and a New Keynesian model. Our analysis also informs empirical analysis concerning identification strategies about shocks to expectations.

Bartels, Maren, Johannes Binswanger, and Manuel Oechslin (2024): "Uncertainty, Openness to Novelty, and Economic Growth", Working Paper.

Abstract: Successful innovations are a key driver of long-run economic growth. In practice, potential innovations come with a great deal of uncertainty, i.e., a dearth of objective information on the likelihood of eventual success or failure. We present a tractable growth model in which entrepreneurs are characterized by their openness to novelty. Greater openness makes it more likely that, against the backdrop of uncertainty, potential innovations are checked out; but greater openness can also lead to exuberance, to negative signs being ignored -- and then to misallocation and crisis-induced paralysis. We analyze this trade-off and show that it implies a hump-shaped relationship between openness and long-run growth. The calibrated model predicts that over a significant part of the range the negative effect of openness dominates, a result we show to be consistent with the empirical pattern. On the other hand, the calibrated model suggests that heterogeneity in entrepreneurial openness to novelty, leading to diversity in beliefs about an innovation, helps growth. Under uncertainty, belief diversity is an advantage and not an "aberration".