Working Papers:
Forward Guidance in an Uncertain World (Job Market Paper)
Abstract
I investigate the impact of state-contingent forward guidance in monetary policy under incomplete markets and aggregate uncertainty. I develop a novel recursive approach using a global solution method that enables a thorough quantitative study of forward guidance contingent on macroeconomic states - a question previously unexplored in the literature. My results reveal that state-contingent forward guidance generates substantially smaller effects on current output, consumption, and inflation than non-state-contingent guidance, which is implemented irrespective of the future state of the economy. Households facing aggregate and idiosyncratic risks have stronger precautionary savings than in the absence of aggregate uncertainty and respond even less to state-contingent policy announcements: state-contingent forward guidance leaves room for uncertainty about future rate shifts and only partially increases the predictability of future policy, thereby limiting its effectiveness. A global solution method in my work allows for a robust analysis of state-contingent forward guidance with aggregate uncertainty, unexplored in prior studies, and infeasible with methods in the literature that rely on local approximations around the steady state or on perfect foresight, making my work a notable contribution to the literature on forward guidance and, more generally, a methodological innovation allowing for the study of broader monetary policy issues in dynamic stochastic environments.
Forward Guidance with Incomplete Markets in an Ageing Economy (Under revision)
Abstract
I examine the transmission of forward guidance on macroeconomic aggregates using an overlapping generations (OLG) framework with incomplete markets and an ageing population. I study how heterogeneous household responses across different stages of the lifecycle, with varying exposure to risks, shape aggregate outcomes when the economy experiences a demographic shock and is undergoing a demographic transition driven by population ageing. My findings suggest that middle-aged cohorts, with stronger lifecycle dissaving motives, are particularly sensitive to future interest rate cuts, leading to uneven distributional effects, creating winners and losers across age and asset-holding status. The results enable a better understanding of the distributional consequences of the central bank’s communications and can inform policy announcements to improve their effectiveness.
Effects of Income Risks in a Heterogeneous-Agent Incomplete Markets Economy with Human Capital (Under revision)
Abstract
In this paper, I study the effects of uninsurable idiosyncratic income risks on household consumption and on income inequality in a heterogeneous-agent incomplete-insurance framework with human capital. Households accumulate human capital by withdrawing time from work. I study the optimal decision of households to invest time in human capital for income risks, when households have human capital as the only asset, in one scenario, and in another scenario when households have access to a financial asset. With access only to human capital to hedge against income risks, highly persistent and highly variable income shocks cause the highest variation in the dynamics of time invested in human capital, human capital levels, and consumption. Income inequalities are also highest when the risks are more persistent and dispersed. Subsequently, when a financial asset is introduced, time invested in human capital increases with human capital levels for households with low levels of bond holding, and more so when the income shock is negative. Availability of a financial asset to transfer consumption across time allows households to leverage both assets - human capital and bonds - in complementary ways to insure against income risks which changes the pattern of households' responses to good and bad income shocks in terms of time invested in human capital across levels of human capital and realizations of the income shock.