“Monetary Policy Normalization in the New Normal: Quantitative Tightening” (JMP)
Abstract: Do the pace and timing of balance sheet unwinding matter? How does the economy respond to anticipated versus unexpected exit strategies? This paper investigates the implications of various Quantitative Tightening strategies, examining both implementation and announcement effects. We focus on the consequences for financial stability and real variables, particularly the impact of reintroducing government bonds to the market, as well as the effects on reserves demand and balance sheet costs for financial intermediaries during the unwinding process. The paper also explores the dynamics associated with announcement effects. We present empirical evidence on the effects of QT on financial variables and develop a quantitative model with a banking sector to understand the dynamics of different QT strategies. We explore optimality and com- pare cases of commitment and discretion, as well as credibility and finite planning. Our findings indicate that announcing QT with sufficient anticipation yields better macro- financial outcomes. While sales initially have a relatively short-term stimulative effect, as agents anticipate tighter financial conditions in the near future, negative implementation effects eventually arise. Announcing passive unwinding followed by conducting sales leads to lower welfare and higher output volatility. Optimal QE is aggressive, whereas optimal QT is gradual. QT should be more gradual when the maturity of debt is higher, and reserves demand is higher.
“Input-Output linkages in Open Economies” with Philippe Andrade and Viacheslav Sheremirov (Federal Reserve Bank of Boston). Federal Reserve Bank of Boston Working Paper Series
The Aggregate Effects of Sectoral Shocks in an Open Economy – Federal Reserve Bank of Boston (bostonfed.org)
Abstract: We study the aggregate effects of sectoral productivity shocks in a multisectoral New Keynesian open-economy model that allows for asymmetric input-output linkages, both within and between countries, as well as for heterogeneity in sectoral Calvo-type price stickiness. Asymmetries in the international production network play a key role in the model’s ability to produce large domestic effects of foreign sectoral supply shocks and large differential effects of domestic shocks and global shocks. Larger trade openness and substitutability between domestic inputs and foreign inputs can also significantly amplify the effects of foreign and global sectoral shocks on domestic aggregates. In comparison, sectoral heterogeneity in price stickiness does not materially amplify the domestic responses to productivity shocks that originate abroad.
“Corporate Structure and Unconventional Monetary Policy” with Horacio Sapriza
Abstract: Quantitative Easing (QE) increases the ratio of corporate bonds to bank loans, while expansionary conventional monetary policy shows the opposite effect. Based on this empirical evidence, we develop a New-Keynesian model featuring bank-dependent firms that finance their capital expenditures via bank loans and non-dependent firms that issue corporate bonds held by mutual funds. Due to a portfolio rebalancing effect, a QE shock increases the corporate bond ratio, while a standard bank lending channel decreases it, consistent with the empirical evidence.
“Monetary Policy Transmission in Informal Economies” with Mohammed Ait Lahcen
Abstract: We study the transmission of monetary policy in economies with high levels of informality and financial markets segmentation. We show evidence of a negative correlation between different indicators of financial inclusion and the size of the informal economy. Based on this stylized fact, we build a monetary model with ‘’formal” and ‘’informal” households featuring limited participation in financial markets as in Williamson 2008. The degree of interaction between the two types of agents in the goods markets determines the transmission of monetary policy from the financial sector to the rest of the economy. We show analytically that the optimal inflation rate is increasing in the size of the informal sector, for a given path of fiscal policy. We study the performance of a Taylor-Rule and the potential differences between Helicopter Drops and Open Market Operations. We calibrate the model to Mexico and discuss
various policy experiments.
“The Reversal QE”
Abstract: Abadi, Brunnermeier, and Koby (AER, 2023) study the conditions under which a reversal interest rate exists—the rate at which a decrease in the reference interest rate becomes contractionary for lending. This occurs when the reduction in net interest income (NII) for banks outweighs the higher capital gains from bond holdings. We examine a similar channel through quantitative easing (QE): QE also reduces NII, and when it is costly to increase loans due to leverage costs or when banks hold reserves that are return-dominated to satisfy liquidity coverage ratio (LCR) requirements or decrease equity costs, persistent QE may eventually harm banks’ net worth. This channel is influenced by the duration and announcement of the QE exit. Additionally, QE changes the steady-state holdings of government bonds, mitigating the capital gains channel of an expansionary monetary shock.
“Four QEs so far, four different stories: a HANK perspective” with Michael Dobrew and Antzelos Kyriazis
“Accounting for Long-term Macro Finance Trends: UK and US” with Vedanta Dhamija and Gabor Pinter
“Monetary Policy Normalization: The Role of Rate Hikes, MBS and Treasuries” with Florencia Airaudo