Working Papers
“Monetary Policy Normalization in the New Normal: The Role of Quantitative Tightening” (JMP)
Abstract: Do the pace, timing and announcement of balance sheet unwinding matter? 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, the role of reserves demand and balance sheet costs of financial intermediaries during the unwinding process. We also explore 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 compare cases of commitment and discretion, as well as credibility and limited commitment. Our findings indicate that announcing QT with sufficient anticipation yields better macro-financial outcomes. While sales initially have a relatively short-term stimulative effect due to agents precautionary motives, negative implementation effects eventually arise. Announcing passive unwinding followed by conducting sales leads to lower welfare and higher output volatility. Optimal QE is aggressive and optimal QT is gradual. QT should be more gradual when the maturity of debt is higher, and reserves demand is higher. Under the optimal dual policy with commitment, the output gap closes and fully stabilizes 12 quarters earlier than observed in the data.
“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
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.
“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.
“Different Unconventional Monetary Policies, Different Stories? A HANK Perspective” with Michael Dobrew and Antzelos Kyriazis
Abstract: We develop a two-asset HANK model to examine the effects of various unconventional monetary policies, including Quantitative Easing, Operation Twist, and Liquidity Facilities. Our analysis focuses on the macro-financial implications of these policies, as well as their impact on wealth and income inequality through shifts in portfolio composition between liquid and illiquid assets. The model features a financial sector with mutual funds and banks that invest in short- and long-term bonds, reserves, and credit to firms. We find that Operation Twist has weaker effects compared to standard QE interventions, although all strategies are qualitatively similar in their impact on output, inflation, and the composition of liquid and illiquid assets.
“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.
“Credit Growth, Market Power and Long-Term Macro-Finance Trends” with Vedanta Dhamija and Gabor Pinter
Abstract: This paper incorporates credit markets into the Farhi and Gourio (2018) framework, which attributed rising corporate profits and the capital income share to increased market power and risk premia. In our extended model, the relaxation of credit constraints allows firms to borrow more, invest more, and increase profits—potentially reducing the role of market power in explaining the rise in corporate profits. The analysis is expanded to include the U.K. and offers a historical perspective dating back to 1930. Our results show that accounting for credit frictions reduces the estimated rise in market power by 4.6% in the U.S. and 9% in the U.K., nuancing our understanding of the interplay among market power, risk premia and credit markets.
Work in Progress
“The Reversal QE”
Abstract: We study the conditions under which Quantitative Easing (QE) can become contractionary for lending. This occurs when the reduction in banks’ net interest income (NII) outweighs the capital gains from their bond holdings, aligning with the concept of the Reversal Interest Rate. We explore a similar mechanism through central bank balance sheet expansions: QE reduces NII, and when it becomes costly to increase lending—due to leverage costs or the need to hold return-dominated reserves to meet liquidity coverage ratio (LCR) requirements—persistent QE may eventually harm banks’ net worth. This channel is further influenced by the announcement and timing of the QE exit (QT). In particular, an open-ended QE program can erode bank net worth by compressing credit and term spreads. Furthermore, QE alters the steady-state composition of government bond holdings, diminishing the capital gains channel associated with expansionary monetary shocks.
“Monetary Policy Normalization: The Role of Rate Hikes, Mortgages and Treasuries” with Florencia Airaudo
Abstract: We develop a quantitative model with housing and a banking sector that invests in reserves, government bonds, and mortgage credit to explore the consequences of Central Bank balance sheet reductions, either through mortgage-backed securities (MBS) or treasuries. We solve for transitional dynamics, focusing on the evolution of macro-financial variables and comparing alternative strategies under a welfare metric. Additionally, we examine the interplay between balance sheet adjustments and the short-term interest rate.