Thomas Mertens, Research Advisor, Federal Reserve Bank of San Francisco

Thomas Mertens

Research Advisor

Financial Research

Finance, Macroeconomics, Computational methods

thomas.mertens (at)


Working Papers
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Volatile Stock Markets: Equilibrium Computation and Policy Analysis

Unpublished manuscript | With Schneemeier | November 2011

The Social Cost of Near-Rational Investment

2016-16 | With Hassan | August 2016

abstract (+)
We show that the stock market may fail to aggregate information even if it appears to be efficient, and that the resulting decrease in the information content of prices may drastically reduce welfare. We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors when forming expectations about future productivity. As information aggregates in the market, these errors amplify and crowd out the information content of stock prices. When prices reflect less information, the conditional variance of stock returns rises, causing an increase in uncertainty and costly distortions in consumption, capital accumulation, and labor supply.
Currency Manipulation

2016-15 | With Hassan and Zhang | December 2016

abstract (+)
We propose a novel, risk-based transmission mechanism for the effects of currency manipulation: policies that systematically induce a country’s currency to appreciate in bad times lower its risk premium in international markets and, as a result, lower the country’s risk-free interest rate and increase domestic capital accumulation and wages. Currency manipulations by large countries also have external effects on foreign interest rates and capital accumulation. Applying this logic to policies that lower the variance of the bilateral exchange rate relative to some target country (“currency stabilization”), we find that a small economy stabilizing its exchange rate relative to a large economy increases domestic capital accumulation and wages. The size of this effect increases with the size of the target economy, offering a potential explanation why the vast majority of currency stabilizations in the data are to the U.S. dollar, the currency of the largest economy in the world. A large economy (such as China) stabilizing its exchange rate relative to a larger economy (such as the U.S.) diverts capital accumulation from the target country to itself, increasing domestic wages, while decreasing wages in the target country.
Published Articles (Refereed Journals and Volumes)
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Not So Disconnected: Exchange Rates and the Capital Stock

Journal of International Economics, July 2016 | With Hassan and Zhang

Information Aggregation in a Dynamic Stochastic General Equilibrium Model

In NBER Macroeconomics Annual 2014, 29, ed. by Parker and Woodford | National Bureau of Economic Research, 2015. 159-207 | With Hassan

abstract (+)
We introduce the information microstructure of a canonical noisy rational expectations model (Hellwig, 1980) into the framework of a conventional real business cycle model. Each household receives a private signal about future productivity. In equilibrium, the stock price serves to aggregate and transmit this information. We find that dispersed information about future productivity affects the quantitative properties of our real business cycle model in three dimensions. First, households’ ability to learn about the future affects their consumption-savings decision. The equity premium falls and the risk-free interest rate rises when the stock price perfectly reveals innovations to future productivity. Second, when noise trader demand shocks limit the stock market’s capacity to aggregate information, households hold heterogeneous expectations in equilibrium. However, for a reasonable size of noise trader demand shocks the model cannot generate the kind of disagreement observed in the data. Third, even moderate heterogeneity in the equilibrium expectations held by households has a sizable effect on the level of all economic aggregates and on the correlations and standard deviations produced by the model. For example, the correlation between consumption and investment growth is 0.29 when households have no information about the future, but 0.41 when information is dispersed.
Fraud Deterrence in Dynamic Mirrleesian Economies

Journal of Monetary Economics 60(2), March 2013, 139-151 | With Armenter

abstract (+)
Insurance schemes rely on legal consequences to deter fraud and tax evasion. This observation guides us to introduce random state verification in a dynamic economy with private information. With some probability, an agent’s skill becomes known to the planner who prescribes punishments to misreporting agents. Deferring consumption can ease the provision of incentives creating a motive for subsidizing savings. In an infinite horizon economy, the constrained-efficient allocation converges to high consumption, full insurance, and no labor distortions for any positive probability of state verification.
Market Sentiment: A Tragedy of the Commons

American Economic Review Papers and Proceedings 101(3), May 2011, 402-405 | With Hassan

abstract (+)
We present a model in which investors decide whether or to what degree they want to allow their behavior to be influenced by “market sentiment.” Investors who choose to insulate their decisions from market sentiment earn higher expected returns, but incur a small mental cost. We show that if information is moderately dispersed across investors, even a very small mental cost may result in a significant amount of sentiment in equilibrium: Individuals who choose to be swayed by sentiment increase uncertainty about the future and make it less costly for others to be swayed by sentiment as well.
Consumer Finance Protection

In Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, ed. by Acharya, Cooley, Richardson, and Walter | Hoboken, NJ: NYU Stern School of Business and John Wiley & Sons, 2011. 73-84 | With others

Central Bank Independence and the Role of the Fed

In Real-Time Solutions for Financial Reform, ed. by Acharya, Cooley, Richardson, and Walter | New York: NYU Stern Working Group on Financial Reform, 2009 | With others

Consumer Finance Protection Agency: Is There a Need?

In Real-Time Solutions for Financial Reform, ed. by Acharya, Cooley, Richardson, and Walter | New York: NYU Stern Working Group on Financial Reform, 2009 | With others