Nicholas Sander

Research:

Policy Reports

"The Great Tightening: Lesson from the recent inflation episode" (with Jorge Alvarez (co-lead), Emine Boz (co-lead), Thomas Kroen, Alberto Musso, Galip Kemal Ozhan, Sebastian Wende and Sihwan Yang)

World Economic Outlook (October 2024 Report) - Chapter 2.

The recent global inflationary experience was characterized by large sectoral demand shifts amid supply disruptions and unprecedented fiscal and monetary stimulus. Chapter 2 shows that the pass-through of sectoral price pressures to core inflation, and the shifting and steepening of the Phillips curve are essential to understanding the global inflation surge. This is consistent with key sectors hitting their supply bottlenecks as demand rotated across sectors and was boosted by a drawdown of savings. The chapter offers a new monetary policy lesson and confirms an old one. In extreme cases with widespread sectoral supply bottlenecks and strong demand, inflation can surge, but tighter policy can bring it down quickly with limited output costs. Outside of such cases, when supply bottlenecks are confined to specific sectors, conventional policy rules perform well.

Publications:

"SME Failures Under Large Liquidity Shocks: An Application to the COVID-19 Crisis,"  ( with Pierre-Olivier Gourinchas and Sebnem Kalemli Ozcan and Veronika Penciacova)
Journal of European Economic Association (2024, July)
NBER Working Paper No. 27877
Bank of Canada working paper 2023-32
IMF Working Paper 2020/207
Federal Reserve Bank of Atlanta Working paper 2020-21a

We develop a flexible framework for tracking business failures during economic downturns. Our framework combines firm-level data with a model of cost-minimization where firms react to a rich set of shocks and fail if illiquid. After verifying that our methodology approximates past official failure rates, we apply it to the COVID-19 crisis in 11 countries. Absent government support, SME failures would have increased by 6.15 percentage points, representing 3.15 percent of employment. We find little threat to financial stability. Commonly implemented COVID-19 policies saved firms but were costly because funds were directed to firms that could survive without support.

"Fiscal Policy in the Age of COVID: Does it 'Get in All of the Cracks?'"  ( with Pierre-Olivier Gourinchas and Sebnem Kalemli Ozcan and Veronika Penciacova)
Jackson Hole Symposium Proceedings (2021)
NBER Working Paper No. 29293, September 2021
Bank of Canada Working paper 2022-45

We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level. First, we estimate the impact of COVID-19 and policy responses on small and medium sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find: (a) Absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging market economies (EMs). With policy support it only increased by 4.3 percentage points, and even decreased in advanced economies (AEs). (b) Fiscal policy was poorly targeted: most of the funds disbursed went to firms who did not need it. (c) Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many ‘zombie’ firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that: (d) a sizable share of the global economy is demand-constrained under COVID-19, especially so in EMs. (e) Globally, fiscal policy helped offset about 8% of the downturn in COVID, with a low ‘traditional’ fiscal multiplier. Yet it significantly reduced the share of demand-constrained sectors, preserving employment in these sectors. (f) Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. (g) A two-speed recovery would put significant upwards pressure on global interest rates which imposes an additional headwind on the EM recovery. (h) Corporate and sovereign spreads rise when global rates increase, suggesting that EM may face challenging external funding conditions as AEs economies normalize.

“COVID-19 and SMEs: a 2021 “Time Bomb”?”  (with Pierre-Olivier Gourinchas and Sebnem Kalemli Ozcan and Veronika Penciacova)
AER Papers and Proceedings, May 2021

This paper assesses the prospects of a 2021 time bomb in SME failures triggered by the generous support policies enacted during the 2020 COVID-19 crisis. Policies implemented in 2020, on their own, do not create a 2021 “time-bomb” for SMEs. Rather, business failures and policy costs remain modest. By contrast, credit contraction poses a significant risk. Such a contraction would disproportionately impact firms that could survive COVID-19 in 2020 without any fiscal support. Even in that scenario, most business failures would not arise from excessively generous 2020 policies, but rather from the contraction of credit to the corporate sector.

Working papers:

Monetary Policy under Network-Level Bottlenecks (with Kemal Ozhan, Sebastian Wende and Sihwan Yang)

This paper examines monetary policy under temporary, sector‑level supply bottlenecks using a rich production‑network framework. We first show that binding sectoral constraints steepen the aggregate supply curve and introduce novel trade‑offs when interacting with demand shifts. We then embed this mechanism in a calibrated two‑region, multi‑sector New Keynesian model with occasionally binding constraints. First, we use the model to generate policy lessons when some sectors in the economy face supply constraints while others may face deficient demand. Second, we fit the model to 2020–24 and quantify how bottlenecks amplified inflation and output volatility during COVID‑19. Unlike standard supply shocks, temporary sectoral constraints create a trade-off between economic stability when constrained and economic stability afterwards—so that crisis‑period focus can worsen later aggregate adjustments. We also show that coordinated tightening across regions mitigates inflation spillovers through the production network, indicating that the global slack is an important independent determinant of domestic inflation.

"Invoicing Currency Concentration and Currency Risk Premia" (with Julien Bengui) New draft coming soon!

The dominance of a few select currencies in invoicing is a key characteristic the international trade system. Using a multi-country sticky price model, we show that this invoicing currency concentration shapes the cross-section of interest rates and currency risk premia and can account for the unconditional carry trade. Dominant country risk plays an outsize role for global consumption risk, and countries more exposed to dominant country risk see their exchange rates appreciate in global downturns. As a result, they face lower interest rates and currency risk premia, consistent with the data. This suggests a new factor explaining currency returns and a novel source of complementarity between a currency's dominance in  trade and finance.

  “The Macroeconomic Effects of Portfolio Equity Inflows” 

I provide evidence that portfolio equity inflows can have expansionary effects on GDP and inflation if not offset by monetary policy. I use a shift-share instrument to estimate equity inflows based on plausibly exogenous timing of inflows into mutual funds with heterogeneous country portfolios. For countries with fixed exchange rates, GDP rises for at least two years following an exogenous inflow with a peak effect of 0.8 percent after 18 months. This is driven by rises in investment and exports, where the latter response is inconsistent with standard expenditure switching channel mechanisms. Non-fixing countries maintain GDP roughly at the same pre-shock levels but achieve this with higher interest rates.

Work in Progress: Click if you are Wenting

"Fiscal Policy in the Age of Supply Shocks" ( with Pierre-Olivier Gourinchas and Sebnem Kalemli Ozcan)

"The Macroprudential Implications of Cryptocurrency" (with Ganesh Viswanath-Natraj)