Fernanda Nechio

In the past two decades, a number of banks joined global initiatives aimed to mitigate climate change by “greening” their asset portfolios. We study whether banks that made such commitments have a different emission exposure of their portfolios of syndicated loans than banks that did not. We rely on loan-level information with global coverage combined with country-industry information on emissions. We find that all banks have reduced their loan-emission exposures over the last 8 years. However, we do not find differences between banks that did and those that did not signal their sustainability goals, with the exception of early signers of Principles of Responsible Investments (PRI), who already had lower exposure to emissions through their syndicated lending. In addition, banks that signed PRI shortened the maturity of the loans extended to highly-emitting industries but only temporarily. Thus, we conclude that banks reduced their exposure to climate transition risks on average, but voluntary climate commitments did not contribute to syndicated loan reallocation away from highly-emitting sectors.

We assess how within euro area labor mobility impacts economic dynamics in response to shocks. In the analysis we use an estimated two-region monetary union dynamic stochastic general equilibrium model that allows for a varying degree of labor mobility across regions. We find that, in contrast with traditional optimal currency area predictions, enhanced labor mobility can either mitigate or exacerbate the extent to which the two regions respond differently to shocks. The effects depend crucially on the nature of shocks and variable of interest. In some circumstances, even when it contributes to aligning the responses of the two regions, labor mobility may complicate monetary policy tradeoffs. Moreover, the presence and strength of financial frictions have important implications for the effects of labor mobility. If the periphery’s risk premium is more responsive to its indebtedness than our estimates, there are various shocks for which labor mobility may help stabilize the economy. Finally, the euro area’s economic performance following the Global Financial Crisis would not have been necessarily smoother with enhanced labor mobility.

wp2024-06_appendix.pdf – Supplemental Appendix

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.

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. In the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence, hampering the ability of sticky-price models to generate persistent real exchange rate deviations from parity.

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, in aggregate, to adjust to shocks that have consequences for the economy’s 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.

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.

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.

wp10-26bk-appendix.pdf – Appendix

We develop a tractable multicountry general equilibrium model with imperfect capital mobility to explore the implications of demographic trends for the evolution of real interest rates across countries and over time. We calibrate the model to study how the interaction of international financial integration and both domestic and foreign demographic developments shapes low-frequency movements in a country’s real interest rate. The key insight from the model is that the real interest rate in a more financially integrated country is relatively more sensitive to global developments than to domestic factors. We estimate panel error-correction models relating real interest rates to many of its possible drivers—demographics included—imposing some structure motivated by the lessons from the theory. The empirical results show that global factors and domestic demographic variables are robust determinants of real interest rates. Alternative specifications showcase the importance of accounting for time-varying financial integration and of controlling for a range of possible real rate drivers. Both the model and the empirical analysis suggest demographic trends can account for a non-negligible portion of the global decline in real interest rates. Given available projections, demographic factors should continue to exert downward pressure on real interest rates going forward.

The significant rise in inflation (nearly) worldwide has been associated with different shocks and a range of policy responses to the COVID-19 pandemic. We study how the design of fiscal support measures helps explain the origins of the post-pandemic inflationary bout by exploring the heterogeneity of fiscal support measures across 10 large economies. Because conventional measures of real activity were distorted in the early stages of the pandemic, we control for the underlying state of the real economy using household sentiment data. We find that five weeks following support announcements, fiscal support measures already had statistically and economically significant, albeit not large, inflationary effects. The magnitude of the effect was twice as large in an environment of improving consumer sentiment and, in that case, the effects did not differ significantly whether the fiscal support targeted consumers or firms. Moreover, the inflationary effect was larger and much more immediate if the support involved cash transfers. Our findings suggest that policy design mattered for the underlying inflationary pressures in the aftermath of the pandemic.

We review two previous bouts of high inflation and disinflation since Brazil adopted inflation targeting. In both episodes, fiscal sustainability concerns were present and inflation expectations became unanchored despite substantial monetary policy tightening. Disinflation and the re-anchoring of expectations took time and proved costly, as both episodes entailed a recession. They required tight monetary policy combined with critical shifts toward structural economic reforms and sound fiscal policy. The ongoing episode features the same fiscal concerns and unanchored inflation expectations. This suggests the path ahead for disinflation will be challenging, unless policies change direction. We also speculate whether the Brazilian experience can provide insights for other countries.

Following the worst of the COVID-19 pandemic, inflation surged to levels last seen in the 1980s. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and its feedback to wages. We exploit the differences in pandemic support to identify the effect that these programs had on inflation and the passthrough to wages. Our empirical approach focuses on a novel dynamic difference-in-differences method based on local projections. Our estimates suggest that an increase of 5 percentage points in direct transfers (relative to trend) translates into about a peak 3 percentage points boost to inflation and wage growth. Moreover, higher inflation accentuates the role of inflation expectations on wage-setting dynamics.

Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, that are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term — hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, however, IV estimation poses challenges, as the validity of potential instruments depends on various unobserved features of the economic environment. We argue in favor of OLS estimation of monetary policy rules. To that end, we show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors due to monetary policy shocks. Using Monte Carlo simulations, we then show that this relationship also holds in a quantitative model of the U.S. economy. Since monetary policy shocks explain only a small fraction of the variance of regressors typically included in monetary policy rules, the endogeneity bias tends to be small. For realistic sample sizes, OLS outperforms IV. Finally, we estimate a standard Taylor rule on different subsamples of U.S. data and find that OLS and IV estimates are quite similar.

Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the price distribution, however, it misses on the magnitude of the adjustment conditional on selection.

Financial market development affects financial intermediaries, corporations and households, setting the grounds on how these agents can act in the economy. Brazil’s comprehensive reform agenda in recent years has promoted the deepening of credit markets, with households and corporations gaining increased access to credit domestically. These developments have a wide range of implications for monetary policy transmission and financial stability.

The Phillips curve remains central to stabilization policy. Increasing financial linkages, international supply chains, and managed exchange rate policy have given core currencies an outsized influence on the domestic affairs of world economies. We exploit such influence as a source of exogenous variation to examine the effects of the recent financial crisis on the Phillips curve mechanism. Using a difference-in-differences approach, and comparing countries before and after the 2008 financial crisis sorted by whether they endured or escaped the crisis, we are able to assess the evolution of the Phillips curve globally.

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. Depending on the level of aggregation, we find a VAT pass-through rate between 0.4 and 0.7. This implies an upper-level elasticity of 3, at the lowest level of aggregation with 74 categories, and 1(Cobb-Douglas preferences) at a high level of aggregation that distinguishes 10 categories of goods and services.

A three-sector model with a suitably chosen distribution of price stickiness can closely approximate the response to aggregate shocks of New Keynesian models with a much larger number of sectors, allowing for their estimation at much reduced computational cost.

wp2017-12_appendix.pdf – Supplement

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 or firm-specific factor markets. Sectoral factor specificity generates within-sector strategic substitutability and tends to induce 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 parameterization and 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 may serve as a reasonable short-run approximation, whereas economy-wide markets are likely a better description of how factors of production are allocated in the longer run.

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.

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.

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.

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).

sr351.html – Earlier version, issued as Federal Reserve Bank of New York Staff Report 351 (October 2008)

Covid-19 has brought severe economic consequences for the global economy. Worldwide, fiscal and monetary authorities responded with unprecedented measures providing lifelines to households and firms, as well as safeguarding the well-functioning of credit and financial markets. Banco Central do Brasil lowered its policy rate to a record low level and implemented measures to increase liquidity and ease capital requirements. The government implemented a sizable income transfer program and several credit programs targeting small and medium businesses, among other initiatives. Brazil recovered strongly in the second half of 2020 and should continue its path to recovery as the health crisis recedes.

do-people-understand-monetary-policy – Vox.LACEA