Fernanda Nechio, Research Advisor, Federal Reserve Bank of San Francisco

Fernanda Nechio

Research Advisor

International Research

International finance, Macro, Monetary economics

Fernanda.Nechio (at) sf.frb.org


Working Papers
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Measuring the Effect of the Zero Lower Bound on Monetary Policy

2016-06 | With Carvalho and Hsu | December 2016

abstract (+)
The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed’s ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication.
Sticker Shocks: Using VAT Changes to Estimate Upper-Level Elasticities of Substitution

2015-17 | With Hobijn | May 2017

abstract (+)
We estimate the upper-level elasticity of substitution between goods and services of a nested aggregate CES preference specification. We show how this elasticity can be derived from the long-run response of the relative price of a good to a change in its VAT rate. We estimate this elasticity using new data on changes in VAT rates across 74 goods and services for 25 E.U. countries from 1996 through 2015. Our point estimates are of an upper-level elasticity of 1, at a high level of aggregation that distinguishes 10 categories of goods and services, and 3, at the lowest level of aggregation with 74 categories.
Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models

2014-17 | With Carvalho | March 2015

abstract (+)
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.
Shocks to Firms

2013-32 | With Daly, Fernald, and Jorda | March 2016

abstract (+)
The manner firms respond to shocks reflects fundamental features of labor, capital, and commodity markets, as well as advances in finance and technology. Such features are integral to constructing models of the macroeconomy. In this paper we document secular shifts in the margins firms use to adjust to shocks that have consequences for their cyclical behavior. These new business cycle facts on the comovement of output and its inputs are a natural complement to analyzing output and its expenditure components. Our findings shed light on the changing cyclicality of productivity in response to different shocks.
Real Exchange Rate Dynamics in Sticky-Price Models with Capital

2012-08 | With Carvalho | July 2012

abstract (+)
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

abstract (+)
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.
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Published Articles (Refereed Journals and Volumes)
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Factor Specificity and Real Rigidities

Review of Economic Dynamics 22, October 2016, 208-222 | With Carvalho

Demographics and Real Interest Rates: Inspecting the Mechanism

European Economic Review 88, September 2016, 208-226 | With Carvalho and Ferrero

abstract (+)
The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity-or expectations thereof-puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.
Do People Understand Monetary Policy?

Journal of Monetary Economics 66, September 2014, 108-123 | With Carvalho

abstract (+)
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

abstract (+)
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

abstract (+)
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).
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sr351.html – Earlier version, issued as Federal Reserve Bank of New York Staff Report 351 (October 2008)
FRBSF Publications
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How Important Is Information from FOMC Minutes?

Economic Letter 2016-37 | December 19, 2016 | With Wilson

Has the Fed Fallen behind the Curve This Year?

Economic Letter 2016-33 | November 7, 2016 | With Rudebusch

Fed Communication: Words and Numbers

Economic Letter 2016-26 | September 6, 2016 | With Regan

Fed Policy Liftoff and Emerging Markets

Economic Letter 2016-22 | July 18, 2016 | With Bevilaqua

Fed Communication and the Zero Lower Bound

Economic Letter 2016-21 | July 11, 2016 | With Carvalho and Hsu

Interview with John Williams about China’s Growth Prospects

FRBSF 2015 Annual Report | Feb 2016 | With Liu and Spiegel

Finding Normal: Natural Rates and Policy Prescriptions

Economic Letter 2015-22 | July 6, 2015 | With Daly and Pyle

Have Long-Term Inflation Expectations Declined?

Economic Letter 2015-11 | April 6, 2015

Mixed Signals: Labor Markets and Monetary Policy

Economic Letter 2014-36 | December 1, 2014 | With Bosler and Daly

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

Other Works
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Do people understand monetary policy?

VoxLacea, April 29, 2014, LSE-USAppm, May 19, 2014 | With Carvalho

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The Role of Foreign Currency Linked Debt in Brazilian Public Debt

Master Thesis (in Portuguese), April 2006

abstract (+)
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

abstract (+)
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