Current Unpublished Working Papers
Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models
2014-17 | With Carvalho | September 2014
We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence – policy inertia or persistent policy shocks – is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence.
Okun’s Macroscope and the Changing Cyclicality of Underlying Margins of Adjustment
2013-32 | With Daly, Fernald, and Jorda | September 2013
A growth-accounting decomposition of “Okun’s Law” sheds light on the empirical magnitude of key margins of adjustment used by firms and households. Using this decomposition, we investigate the evolution of the business-cycle comovement between different components of the production function and unemployment. Changes in the cyclical behavior of labor productivity stand out. Our results provide insight into desirable features of macro models that seek to match central facts about both labor markets and business cycles.
Factor Specificity and Real Rigidities
2013-31 | With Carvalho | September 2013
We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity might be a reasonable short-run approximation, whereas economy-wide markets might be a better description of how factors of production are allocated in the longer run.
Real Exchange Rate Dynamics in Sticky-Price Models with Capital
2012-08 | With Carvalho | July 2012
The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence – policy inertia or persistent policy shocks – is key.
Foreign Stock Holdings: The Role of Information
2010-26 | September 2014
Using the Survey of Consumer Finances data about individual stocks ownership, I compare households’ decision to invest in domestic versus foreign stocks. The data show that information plays a larger role in households’ decision to enter foreign stock markets. Households that invest in foreign stocks are more sophisticated in their sources of information – they use the Internet more often as a main source of information, talk to their brokers, trade more frequently, and shop more for investment opportunities. Adding to the wedge between the two groups of investors, foreign stock owners are also substantially wealthier, more educated, and less risk averse than households who focus on domestic stocks only. Furthermore, ownership of foreign stocks increases if the household is headed by women.
Published Articles (Refereed Journals and Volumes)
Do People Understand Monetary Policy?
Journal of Monetary Economics 66, September 2014, 108-123 | With Carvalho
We combine questions from the Michigan Survey about future inflation, unemployment, and interest rates to investigate whether households are aware of the basic features of U.S. monetary policy. Our findings provide evidence that some households form their expectations in a way that is consistent with a Taylor (1993)-type rule. We also document a large degree of variation in the pattern of responses over the business cycle. In particular, the negative relationship between unemployment and interest rates that is apparent in the data only shows up in households’ answers during periods of labor market weakness.
Labor Markets in the Global Financial Crisis: The Good, the Bad and the Ugly
National Institute Economic Review 228: R58-R64, May 2014 | With Daly, Fernald, and Jorda
This note examines labor market performance across countries through the lens of Okun’s Law. We find that after the 1970s but prior to the global financial crisis of the 2000s, the Okun’s Law relationship between output and unemployment became more homogenous across countries. These changes presumably reflected institutional and technological changes. But, at least in the short term, the global financial crisis undid much of this convergence, in part because the affected countries adopted different labor market policies in response to the global demand shock.
Aggregation and the PPP Puzzle in a Sticky Price Model
American Economic Review 101(6), October 2010, 2391-2424 | With Carvalho
We study the purchasing power parity (PPP) puzzle in a multi-sector, two-country, sticky-price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. We show analytically that in this economy, deviations of the real exchange rate from PPP are more volatile and persistent than in a counterfactual one-sector world economy that features the same average frequency of price changes, and is otherwise identical to the multi-sector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from PPP of 39 months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the different approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the “PPP Strikes Back debate” (Imbs et al. 2005a,b and Chen and Engel 2005).
– Earlier version, issued as Federal Reserve Bank of New York Staff Report 351 (October 2008)
Household Expectations and Monetary Policy
Economic Letter 2014-18 | June 23, 2014 | With Carvalho
Interpreting Deviations from Okun’s Law
Economic Letter 2014-12 | April 21, 2014 | With Daly, Fernald, and Jorda
Fed Tapering News and Emerging Markets
Economic Letter 2014-06 | March 3, 2014
Labor Markets in the Global Financial Crisis
Economic Letter 2013-38 | December 23, 2013 | With Daly, Fernald, and Jorda
Pricey Oil, Cheap Natural Gas, and Energy Costs
Economic Letter 2012-23 | August 6, 2012 | With Hale
Are U.S. Corporate Bonds Exposed to Europe?
Economic Letter 2012-17 | June 4, 2012 | With Hale and Marks
U.S. and Euro-Area Monetary Policy by Regions
Economic Letter 2012-06 | February 27, 2012 | With Malkin
Monetary Policy When One Size Does Not Fit All
Economic Letter 2011-18 | June 13, 2011
Long-Run Impact of the Crisis in Europe: Reforms and Austerity Measures
Economic Letter 2011-07 | March 7, 2011
The Greek Crisis: Argentina Revisited?
Economic Letter 2010-33 | November 1, 2010
Do people understand monetary policy?
VoxLacea, April 29, 2014, LSE-USAppm, May 19, 2014 | With Carvalho
The Role of Foreign Currency Linked Debt in Brazilian Public Debt
Master Thesis (in Portuguese), April 2006
This paper analyses the management of foreign-currency-linked debt between 1994 and 2003. I estimate the optimal debt composition through a cost and risk minimization model applied to recent Brazilian data. I look at the optimal monetary policy followed by a country highly indebted in foreign currency-linked debt when facing external crises. The results suggest that the optimal composition of the public debt implies a massive use of price-linked indexed bonds. When facing an external crisis, the optimal monetary policy should be more restrictive given the high level of foreign-currency-linked debt.
Public Debt and Confidence Crises: A Comparative Approach
Summer Paper (in Portuguese), April 2003
This paper compares the two recent crises the Brazilian economy faced in 2002 and 1998. Once more questions whether the Brazilian government would fulfill its contracts jeopardized the composition of the publid debt. This work shows that differently from 1998, the 2002 crisis awards the label of confidence crisis.
Brazilian Public Debt: Decomposition of Its Recent Growth and Simulation of Its Future Path
Senior Thesis (in Portuguese), December 2001