Working Papers

Energy price shocks, Monetary policy and Inequality (with Alina-Gabriela Bobasu, Amalia Repele) (2024) [SSRN]
We study how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model matching salient features of Euro Area data. Our model features energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy, energy price shocks always lead to a reduction in aggregate consumption. Poor households are more adversely affected through both a decline in labor income as well as negative direct price effects. “Active” monetary policies raising rates in response to rising energy prices amplify aggregate outcomes through a reduction in aggregate demand but speed up the recovery by enabling households to rebuild wealth through higher returns on savings. However, poor households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income. 


Make-Up Strategies with Incomplete Markets and Bounded Rationality (with Rafael Gerke, Sebastian Giesen, Joost Roettger) (2023) [SSRN], R&R European Economic Review
We study the impact of market incompleteness and bounded rationality on the effectiveness of make-up strategies. To do so, we simulate a heterogeneous agent New Keynesian (HANK) model with reflective expectations and an occasionally binding effective lower bound (ELB) on the policy rate. Our simulations show that make-up strategies can mitigate the negative consequences of the ELB for inflation and real economic activity. This result holds both for our HANK model as well as a corresponding representative-agent (RANK) model. However, the stabilization benefits of make-up strategies are quite small when agents’ cognitive ability is consistent with micro-evidence. This result is independent of market (in)completeness, emphasising the importance of rational expectations for make-up strategies. Furthermore, while market incompleteness and bounded rationality complement each other in attenuating the effects of forward guidance in our model, we do not observe such a complementarity with respect to the benefits make-up strategies.


Monetary Policy Strategies under Bounded Rationality (with Rafael Gerke, Daniel Kienzler, Alexander Schwemmer) (2023) [SSRN]
We study the welfare performance of various simple monetary policy rules under bounded rationality (BR) along the lines of Gabaix (2020) in a New Keynesian model with sticky wages and an effective lower bound (ELB) on interest rates. Policy strategies with a strong history dependence lose their advantage over inflation targeting in mitigating a demand-driven recessions when interest rates are constrained by the ELB. For supply shocks, inflation targeting outperforms history-dependent rules for a sufficiently high degree of BR. An exponential average inflation targeting rule, which features a variable degree of history dependence, performs remarkably well, independent of the degree of BR. 


(Dis-)Aggregate Consumption and Monetary Policy (2019, currently revising)
This paper studies how empirically observed consumption behavior influences monetary policy transmission into output and prices. I show that extensive margin changes in employment lead households to consume disproportionately more flexible price necessities. In contrast, intensive margin changes of permanent income prompt households to consume more sticky price luxuries. Empirical impulse responses to high-frequency identified shocks show that monetary policy predominantly works through the extensive margin. I analyze the theoretical implications in a representative family New Keynesian model with two key features: i) non-homothetic preferences between necessities and luxuries (intensive margin) and ii) home production of necessities by unemployed household members (extensive margin). In the model expansionary monetary policy increases employment but thereby reduces home production. Households smooth consumption by increasing market demand for necessities which due to the higher price flexibility implies faster transmission into prices with little additional output gains. Optimal policy in turn follows a dual mandate in inflation and employment stabilization.