Who's at Risk? Effects of Inflation on Unemployment Risk
with Hie Joo Ahn
We empirically investigate the distributional effects of inflation on workers' unemployment tail risks using instrumental variable quantile regression. We find that supply-driven inflation disproportionately raises unemployment tail risks for cyclically vulnerable workers in both the short and medium term, while demand-driven inflation has differential effects---limited to race and reason for unemployment---only in the medium term. Demand-boosting policies, including monetary policy, can inadvertently widen those disparities through the inflation channel, underscoring the importance of inflation stabilization in promoting equitable growth in the labor market. Our findings could be explained structurally by heterogeneity in experienced inflation and wage inflation expectations.
Economic relations change over time and with the business cycle. This paper proposes a new Markov Chain Monte Carlo algorithm to estimate a sign-restricted structural vector autoregression on time series that are subject to regime shifts. My approach can incorporate useful prior information about both model parameters and hidden states while transparently imposing sign restrictions. I illustrate my method by revisiting the literature on asymmetric effects of conventional monetary policy during recessions and expansions. My evidence suggests that previous empirical research found asymmetric effects by questionable identification schemes and neglecting changes in the variances of structural shocks. I find little difference in the structural parameters, and thus I do not find evidence of asymmetry. (Presentation Slides)
Bayesian Inference in Structural Vector Autoregression with Sign Restrictions and External Instruments (Revision Requested at Journal of Monetary Economics)
Instrument validity cannot be tested in a just-identified model, and it is not clear what conclusion to draw when instrument validity is rejected in an over-identified model. In practice researchers tend to regard instruments as valid when they lead to sensible inferences. This paper uses Bayesian methods to formalize this idea. I develop a proxy structural vector autoregression in which prior information from both theory and the empirical literature is incorporated about signs and magnitudes of certain parameters and equilibrium impacts. I use my method to investigate the relevance and validity of three popular instruments for monetary policy shocks, developed by Romer and Romer (2004), Sims and Zha (2006), and Smets and Wouters (2007). I find that all of them are strongly relevant but only that of Smets and Wouters is valid. Furthermore, the empirical analysis demonstrates that my framework can combine information from a relevant and valid instrument with prior information about sign restrictions to improve inference about structural impulse-response functions. (2022 NBER-NSF SBEIS Presentation Slides)
Variable Selection in Macroeconomic Stress Test: A Bayesian Quantile Regression Approach
with Mai Dao, Empirical Economics, Volume 68, pages 1113-1169, 2025
The key assumption in stress test scenarios is that selected risk factors are useful in predicting banks’ tail risks under severe economic conditions. We argue that high-dimensional Bayesian quantile regression models with shrinkage priors are ideal for identifying those factors. We illustrate our methods by identifying key drivers for banks with different asset sizes from a high-dimensional database. We found that leverage indicators, asset prices, and labor market measures are the best predictors of banks’ performance. The usefulness of our methods is further demonstrated by a forecast comparison between the selected variables and those used in the regulatory stress tests. (2023 NBER-NSF SBEIS Presentation Slides)
Fiscal Dominance and Inflation: Evidence from Sub-Saharan Africa
with John Hooley, Mika Saito, and Shirin Nikaein Towfighian , Public Sector Economics, September 2024, Vol. 48, pages 363-391 (IMF Working Paper No.2021/017)
During the Covid-19 pandemic, the debate on monetary financing was reignitehie d and several economists called for governments to borrow from their central banks to finance larger deficits. Sub-Saharan Africa provides useful insights into this debate since it is a region where “fiscal dominance” has long been widespread. We find that fiscal dominance is stronger during periods of pressure on public finances, particularly when alternative financing options are limited. We also find that central bank financing of government does have an inflationary impact through the exchange rate channel. Numerical legal limits on central bank financing can be an effective way to mitigate the risks, even if they are not always binding.
Effects of Fed Announcements on Emerging Markets: What Determines Financial Market Reactions?
with Prachi Mishra and Papa N'Diaye, IMF Economic Review, December 2018, Vol. 66(4), pages 732-762. (IMF Working Paper No. 14/109)
This paper analyzes market reactions to the 2013-2014 Fed announcements related to the tapering of asset purchases and examines how these reactions are influenced by financial depth. The study focuses on long-term government bond yields and uses daily data for all emerging markets. Controlling for all time-invariant country characteristics as well as time-varying macroeconomic fundamentals (changes in current account, fiscal balance, GDP growth, and inflation), countries with deeper domestic financial markets (as measured by higher bank credit, M2, M3, or stock market capitalization) experienced smaller increases in government bond yields during 4-day windows around Federal Open Market Committee announcements related to tapering. Countries with better macroeconomic fundamentals (measured by improvements in current account, fiscal balance, and GDP growth) also experienced smaller increases in government bond yields around such episodes.
Rethinking Financial Deepening: Stability and Growth in Emerging Markets
with IMF team, IMF Staff Discussion Note, May 2015.
Emerging Market Volatility: Lessons from the Taper Tantrum
with IMF team, IMF Staff Discussion Note, September 2014.