WORKING PAPERS / OTHER RESEARCH

Job Market Paper |
Household Heterogeneity and the Transmission of Monetary Policy
 
To what extent does heterogeneity matter for the amplification (or dampening) of monetary policy shocks? Moreover, does a benchmark Heterogeneous Agent New Keynesian (HANK) model fit the heterogeneous response of monetary policy shocks observed in the data? The benchmark HANK model from Kaplan et al. (2018) implies that wealthier households benefit from a greater increase in their income than poorer households from an expansionary monetary policy shock.  However, this prediction is at odds with the empirical evidence.  Using data on U.S. households from the Consumer Expenditure Survey I find that households across the wealth distribution have comparable income responses to an expansionary monetary policy shock, while consumption increases the most for low wealth households. This finding points towards amplification of monetary policy shocks due to the distribution of agents within the economy. Motivated by these discrepancies I innovate on the profit distribution scheme, from a bonus-based scheme (profits are distributed in proportion to labour productivity) to a dividend-based scheme (profits are distributed in proportion to illiquid asset holdings). This innovation brings the distributional response from a monetary policy shock closer to the empirical evidence, however, a mixed scheme is required to ensure the response of aggregate investment is reasonable as it is highly dependent on the income of the wealthy hand-to-mouth households.

 

Working Paper |
Optimal Monetary Policy in the New Keynesian Model with Downward Nominal Wage Rigidity

At the individual and country level nominal wages have been found to be downwardly rigid, such that they are more likely to increase than decrease. This has strong implications for optimal monetary policy in the standard New-Keynesian model, which typically assumes flexible wages or symmetric nominal wage rigidities. When wages are downwardly rigid and households do not fully internalise the constraint, boom-bust cycles can arise due to agents increasing their wage flexibly and the economy then suffers as wages sluggishly fall and remain elevated even after the shock dissipates.  This constraint causes the optimal monetary policy to react asymmetrically to symmetric shocks.  Solving a non-linear model that internalises this constraint at all periods in time dampens wage increases in a model where agents can flexibly increase their wage, thus creating an endogenous rigidity. This work adds to the literature by introducing the downward nominal wage rigidity (DNWR) constraint of Schmitt-Grohé and Uribe (2016) into a standard New-Keynesian model and finding the optimal trend inflation when agents fully understand the existence of this DNWR constraint. Further-more, motivated by the welfare loss generated by using a standard Taylor rule, this paper searches for a new optimal simple rule that can replicate the optimal monetary policy in this framework. Moreover, as with other work on DNWR this paper finds support for ‘greasing the wheels’ - positive trend inflation that helps to deflate real wage increases.

Working Paper |
"Quantitative Easing and Long-Term Yields in Small Open Economies" with Antonio Diez de los Rios and Maral Shamloo

We analyze government bond yield movements of the United Kingdom, Sweden and Switzerland, comparing the effectiveness of their asset purchase announcements with that of the Federal Reserve and the European Central Bank on these smaller open economies. We decompose government bond yields into (i) an expectations component, (ii) a global term premium and (iii) a country specific term premium to analyze two-day changes in 10-year yields around announcement dates. We find that, in contrast to the Federal Reserve and the European Central Bank's asset purchases, the programs implemented in these smaller economies have not been able to affect the global term premium. Furthermore, they have had limited, but significant, effect in lowering long-term yields.

Work in Progress |
"Conventional and Non-Conventional Monetary Policy: Between Core and Periphery" with Luca Onorante

This paper explores the effectiveness of bond and security purchases by a central bank within a calibrated two-country New-Keynesian model featuring a banking sector (an extension of Gertler and Karadi (2011) and Andrade et al. (2016) and a two-country monetary union. Focusing on the Eurozone and motivated by the extended asset purchase programme conducted by the ECB we calibrate key parameters to match Core (Germany, France, Netherlands) and Periphery (Portugal, Italy, Ireland, Greece, Spain) data. We find that security purchases have a stronger impact on inflation and on lift-off time from the Effective Lower Bound than equivalent bond purchases. This finding is in line with the ones of Gertler et al. (2013) for the U.S. economy.

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