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Sanjay R. Singh

Senior Economist
International Research
Macroeconomics, Monetary Economics, International Economics

sanjay.singh (at) sf.frb.org

Profiles: Google Scholar | RePEc | LinkedIn | Twitter | Personal website

Working Papers
Understanding Persistent ZLB: Theory and Assessment

ECB working paper | with Cuba-Borda | December 2021

abstract

Concerns of prolonged stagnation periods with near-zero interest rates and deflation have become widespread in many advanced economies. We build a theoretical framework that rationalizes two theories of low interest rates: expectations-trap and secular stagnation in a unified setting. We analytically derive contrasting policy implications under each hypothesis and identify robust policies that eliminate expectations-trap and reduce the severity of secular stagnation episodes. We provide a quantitative assessment of the Japanese experience from 1998:Q1-2020:Q4. We find evidence favoring the expectations-trap hypothesis and show that equilibrium indeterminacy is essential to distinguish between theories of low interest rates in the data.

Understanding Persistent ZLB: Theory and Assessment

2024-03 | with Cuba-Borda | February 2024

abstract

We develop a theoretical framework that rationalizes two hypotheses of long-lasting low interest rate episodes: deflationary-expectations-traps and secular stagnation in a unified setting. These hypotheses differ in the sign of the theoretical correlation between inflation and output growth that they imply. Using the data from Japan over 1998:Q1-2019:Q4, we find that the data favor the expectations-trap hypothesis. The superior model fit of the expectations trap relies on its ability to generate the observed negative correlation between inflation and output growth.

supplement

wp2024-03_appendix.pdf – Supplemental Appendix

Low Risk Sharing with Many Assets

2023-37 | with Marin | November 2023

abstract

Classical contributions in international macroeconomics rely on goods-market mechanisms to reconcile the cyclicality of real exchange rates when financial markets are incomplete. However, cross-border trade in one domestic and one foreign-currency-denominated risk-free asset prohibits these mechanisms from breaking the pattern consistent with complete markets. In this paper, we characterize how goods markets drive exchange rate cyclicality, taking into account trade in risk-free and/or risky assets. We show that goods-market mechanisms come back into play, even when there is cross-border trade in two risk-free assets, as long as we allow for empirically plausible heterogeneity in the stochastic discount factors of domestic marginal investors.

The Financial Origins of Non-Fundamental Risk

2023-20 | with Acharya and Dogra | May 2023

abstract

We formalize the idea that the financial sector can be a source of non-fundamental risk. Households’ desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate nonfundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the demand for safe assets, through social insurance or by acting as a market maker of last resort.

The Long-Run Effects of Monetary Policy

2020-01 | with Jorda and Taylor | May 2023

abstract

We document that the real effects of monetary shocks last for over a decade. Our approach relies on (1) identification of exogenous and non-systematic monetary shocks using the trilemma of international finance; (2) merged data from two new international historical cross-country databases; and (3) econometric methods robust to long-horizon inconsistent estimates. Notably, the capital stock and total factor productivity (TFP) exhibit greater hysteresis than labor. When we allow for asymmetry, we find these effects with tightening shocks, but not with loosening shocks. When extending the horizon of the responses reported in several recent studies that use alternative monetary shocks, we find similarly persistent real effects, thus supporting our main findings.

Published Articles (Refereed Journals and Volumes)
Incorporating Diagnostic Expectations into the New Keynesian Framework

Forthcoming in Review of Economic Studies | with L’Huillier and Yoo

abstract

Diagnostic expectations constitute a realistic behavioral model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus forecast data. Our estimate of the diagnosticity parameter is in line with previous studies. Moreover, we find empirical evidence in favor of the diagnostic model. Diagnostic expectations offer new propagation mechanisms to explain fluctuations.

Currency Areas, Labor Markets, and Regional Cyclical Sensitivity

Forthcoming in IMF Economic Review | with Russ and Shambaugh

abstract

In his papers during the lead up to the birth of the European Monetary Union, Obstfeld considered whether the countries forming the EMU were sufficiently similar to survive a single monetary policy–and more importantly, whether they had the capacity to adjust to asymmetric shocks given a single monetary and exchange rate policy. The convention at the time was to take the United States as the baseline for a smoothly functioning currency union. We document the evolution of the literature on regional labor market adjustment within the United States, expanding on stylized facts illustrating how stratification in local labor market outcomes appears far more persistent today than 30 years ago in the context of what Obstfeld and Peri (1998) call non-adjustment in unemployment rates. We then extend the currency union literature by adding an additional consideration: differences in regional cyclical sensitivity. Using measures of cyclicality and Obstfeld-Peri-type non-adjustment, we explore the characteristics of places that can get left behind when local labor markets respond differently to national shocks and discuss implications for policy.

Supply or Demand? Policymakers’ Confusion in the Presence of Hysteresis

Forthcoming in European Economic Review | with Fatas

abstract

Policy makers need to separate between temporary demand-driven shocks and permanent shocks in order to design optimal aggregate demand policies. In this paper we study the case of a central bank that ignores the presence of hysteresis when identifying shocks. By assuming that all low frequency output fluctuations are driven by permanent technology shocks, monetary policy is not aggressive enough in response to demand shocks. In addition, we show that errors in assessing the state of the economy can be self-perpetuating if seen through the lens of the mistaken views of the policymaker. We show that a central bank that mistakes a demand shock for a supply shock, will produce permanent effects on output through their suboptimal policies. Ex-post, the central bank will see an economy that resembles what they had forecast when designing their policies. The shock is indeed persistent and this persistence validates their assumption that the shock was a supply-driven one. The interaction between forecasts, policies and hysteresis creates the dynamics of self-perpetuating errors that is the focus of this paper.

Bond Premium Cyclicality and Liquidity Traps

Review of Economic Studies 90(6) , November 2023, 2,822-2,879 | with Caramp

abstract

Safe asset shortages can expose an economy to liquidity traps. The nature of these traps is determined by the cyclicality of the bond premium. A counter-cyclical bond premium opens the possibility of expectations-driven liquidity traps in which small issuances of government debt crowd out private debt and reduce output. In contrast, when the bond premium is pro-cyclical and the economy is in a liquidity trap, government debt is expansionary. In the data, we find evidence of a counter-cyclical bond premium. Large interventions can prevent the emergence of self-fulfilling traps, but they require sufficient fiscal capacity. In a quantitative model calibrated to the Great Recession, a promise to increase the government debt-to-GDP ratio by 20 percentage points precludes the possibility of self-fulfilling traps.

Tariffs and the Macroeconomy

Oxford Research Encyclopedia in Economics and Finance, July 2023 | with Meng and Russ

Longer-Run Economic Consequences of Pandemics

Review of Economics and Statistics 104(1), January 2022, 166-175 | with Jorda and Taylor

abstract

What are the medium- to long-term effects of pandemics? Do they differ from other economic disasters? We study major pandemics using rates of return on assets stretching back to the fourteenth century. Significant macroeconomic after-effects of pandemics persist for decades, with rates of return substantially depressed. The responses are in stark contrast to what happens after wars. Our findings also accord with wage and output responses, using more limited data, and are consistent with the neoclassical growth model: capital is destroyed in wars but not in pandemics; pandemics instead may induce more labor scarcity or more precautionary savings, or both.

Output Hysteresis and Optimal Monetary Policy

Journal of Monetary Economics 117, January 2021, 871-886 | with Garga

abstract

We derive a fully quadratic approximation to welfare under endogenous growth and study optimal monetary policy. Away from the ZLB, optimal commitment policy sets interest rates to eliminate output hysteresis. A strict inflation targeting rule implements the optimal policy. At the ZLB, strict inflation targeting is sub-optimal and admits output hysteresis, defined as a permanent loss in potential output. A new policy rule that targets output hysteresis returns the output to the pre-shock trend and approximates the welfare gains under optimal commitment policy. A central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output.

supplement

ohomp_2020_appendix-2.pdf – Appendix

Log-linear Approximation versus an Exact Solution at the ZLB in the New Keynesian Model

Journal of Economic Dynamics and Control 105, August 2019, 21-43 | with Eggertsson

abstract

How accurate is a log-linear approximation of the New Keynesian model when the nominal interest rate is bounded by zero? This paper compares the solution of the exact non-linear model to the log-linear approximation. It finds that the difference is modest for a common economic scenario. This applies even for extreme events in numerical experiments that replicate the U.S. Great Depression. The exact non-linear model makes the same predictions as the log-linear approximation for key policy questions such as the size and sign of government spending and tax multipliers. It also replicates well known paradoxes like the paradox of toil and the paradox of price flexibility. The paper also reconciles different findings reported in the literature using Calvo versus Rotemberg pricing.

The Effect of Foreign Shocks on the Indian Economy

India Policy Forum 16(1), 2019, 1-54 | with Lakdawala

abstract

The Indian economy has been increasingly exposed to external shocks with growing financial and trade integration. We examine the effects of four key international shocks: shocks to U.S. monetary policy, oil supply, global economic policy uncertainty, and geopolitical risk. Using the external instruments strategy with Local Projections and Structural Vector Autoregression methods, we document the dynamic causal effects of these shocks on the Indian economy. We find significant effects of these foreign shocks on both macroeconomic and financial variables. Combined, these shocks explain about 15 to 35 percent of the variation in inflation, output, and financial variables at two- to four-year horizons. However, the magnitude of effects on output is lower relative to both global output and output of peer developing countries. While the oil shock behaves like a traditional supply shock, the U.S. monetary policy and economic policy uncertainty shocks look more like domestic demand shocks. We discuss the implications for stabilization policy.

A Contagious Maladay? Open Economy Dimensions of Secular Stagnation

IMF Economic Review 64(4), 2016, 581-634 | with Eggertsson, Mehrotra, and Summers

abstract

Conditions of secular stagnation–low interest rates, below target inflation, and sluggish output growth–characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.

FRBSF Publications