Sylvain Leduc

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Sylvain Leduc

Executive Vice President and Director of Research

Monetary policy, Business cycles, and International finance

Sylvain.Leduc (at)

Profiles: Google Scholar | RePEc | SSRN

Working Papers
Reshoring, Automation, and Labor Markets Under Trade Uncertainty

2024-16 | with Firooz and Liu | May 2024


We study the implications of trade uncertainty for reshoring, automation, and U.S. labor markets. Rising trade uncertainty creates incentive for firms to reduce exposures to foreign suppliers by moving production and distribution processes to domestic producers. However, we argue that reshoring does not necessarily bring jobs back to the home country or boost domestic wages, especially when firms have access to labor-substituting technologies such as automation. Automation improves labor productivity and facilitates reshoring, but it can also displace jobs. Furthermore, automation poses a threat that weakens the bargaining power of low-skilled workers in wage negotiations, depressing their wages and raising the skill premium and wage inequality. The model predictions are in line with industry-level empirical evidence.

Climate Change and the Geography of the U.S. Economy

2023-17 | with Wilson | November 2023


This paper examines how the spatial distribution of people and jobs in the United States has been and will be impacted by climate change. Using novel county-level weather data from 1951 to 2020, we estimate the longer-run effects of climate on local population, employment, wages, and house prices using a panel polynomial distributed lag (PDL) model. This model and the long historical data help capture important aspects of local climate changes, such as trends in temperature. The historical results point to long-lasting negative effects of extreme temperatures on each of the outcomes examined. A long lag structure is necessary to appropriately capture the longer-run effects of climate change, as short-run effects are small. Using county-level weather projections based on alternative greenhouse gas emissions scenarios, we use the estimated models to project the spatial distribution of these local economic outcomes out to 2050. Our results point to substantial reallocations of people and jobs across the country over the next three decades, with mobility increasing by between 35 and nearly 100 percent depending on the scenario. Population and employment are projected to shift away from the Sunbelt and toward the North and Mountain West.

supplement – Download high resolution pdf (zipped file)

The Road of Federal Infrastructure Spending Passes Through the States

2022-03 | with Wilson | February 2022


Because federal infrastructure spending largely takes the form of grants to state governments, the macroeconomic impact of such packages depends on the share of federal grants that “passes through” to actual infrastructure spending done by states. A low degree of pass-through would tend to mute the economic impact from federal grants, reflecting a crowd-out effect on state spending. We first revisit Knight’s (2002) influential finding of near-zero pass-through (perfect crowd out) of federal highway grants. That result is found to be specification-sensitive and is reversed completely in a longer sample, with estimates implying dollar-for-dollar pass-through of grants to spending. We then extend the analysis to allow for dynamics. We find a contemporaneous pass-through effect of about 1 and a longer-run cumulative effect of around 1.3. In the parlance of public finance, the flypaper effect is strong.

Clouded in Uncertainty: Pursuing Financial Stability with Monetary Policy

2021-03 | January 2021

Average Is Good Enough: Average-Inflation Targeting and the ELB

2020-21 | with Amano, Gnocchi, and Wagner | June 2020


The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound. This has renewed interest in monetary policies that embed makeup strategies, such as price-level or average-inflation targeting. This paper examines the properties of average-inflation targeting in a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. We examine the optimal degree of history dependence under average-inflation targeting and find it to be relatively short for business cycle shocks of standard magnitude and duration. In this case, we show that the properties of the economy are quantitatively similar to those under a price-level target.

Can Pandemic-Induced Job Uncertainty Stimulate Automation?

2020-19 | with Liu | May 2020


The COVID-19 pandemic has raised concerns about the future of work. The pandemic may become recurrent, necessitating repeated adoptions of social distancing measures (voluntary or mandatory), creating substantial uncertainty about worker productivity. But robots are not susceptible to the virus. Thus, pandemic-induced job uncertainty may boost the incentive for automation. However, elevated uncertainty also reduces aggregate demand and reduces the value of new investment in automation. We assess the importance of automation in driving business cycle dynamics following an increase in job uncertainty in a quantitative New Keynesian DSGE framework. We find that, all else being equal, job uncertainty does stimulate automation, and increased automation helps mitigate the negative impact of uncertainty on aggregate demand.

Precautionary Pricing: The Disinflationary Effects of ELB Risk

2019-26 | with Amano and Carter | October 2019


We construct a model to evaluate the role that the risk of future effective lower bound (ELB) episodes plays as a factor behind the persistently weak inflation witnessed in many advanced economies since the Great Recession. In our model, a range of precautionary channels cause ELB risk to affect inflation and other macroeconomic outcomes even during “normal times” when nominal rates are far away from the ELB. This behavior is enhanced through a growth channel that captures possible long-lasting output declines at the ELB. We show that ELB risk substantially weighs on inflation even when the policy rate is above the ELB. Our model also predicts substantially below-target inflation expectations and negative inflation risk premia.

Published Articles (Refereed Journals and Volumes)
Automation, Bargaining Power, and Labor Market Fluctuations

Forthcoming in American Economic Journal: Macroeconomics | with Liu


We argue that the threat of automation weakens workers’ bargaining power in wage negotiations, dampening wage adjustments and amplifying unemployment fluctuations. We make this argument based on a business cycle model with labor market search frictions, generalized to incorporate automation decisions. In the model, procyclical automation threats create endogenous real wage rigidity that amplifies labor market fluctuations. The automation mechanism is consistent with empirical evidence. It is also quantitatively important for explaining the large volatilities of unemployment and vacancies relative to that of real wages, a puzzling observation through the lens of standard business cycle models.

Exchange Rate Misalignment and External Imbalances: What Is the Optimal Monetary Policy Response?

Journal of International Economics 144(103771), September 2023 | with Corsetti and Dedola


How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete–implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness.

Learning in the Oil Futures Markets: Evidence and Macroeconomic Implications

Review of Economics and Statistics 105(2), March 2023, 392-407 | with Moran and Vigfusson


Using oil futures, we examine expectation formation and how it alters the macroeconomic transmission of shocks. Our empirical framework, where investors learn about the persistence of oil-price movements, successfully replicates the fluctuations in oil-price futures since the Late 1990s. By embedding this learning mechanism in an estimated model, we document that an increase in the persistence of TFP-driven fluctuations in oil demand largely accounts for investors’ perceptions that oil-price movements became increasingly permanent during the 2000s. Learning alters the macroeconomic impact of shocks, making the responses time dependent and conditional on perceptions of shocks’ likely persistence.

Robotic Labour: The Automation Channel of Pandemic-Induced Uncertainty

VoxEU, 2020 | with Liu


The COVID-19 pandemic has raised concerns about the future of work. The pandemic may become recurrent and necessitate repeated adoptions of social distancing measures, creating substantial uncertainty about worker productivity. This column presents a theoretical framework suggesting that such job uncertainty reduces aggregate demand, and dampens business investment in general. However, automation may provide one way for businesses to cope with the uncertainty about worker productivity. It appears that pandemic-induced job uncertainty could stimulate automation investment, despite declines in aggregate demand.

The Weak Job Recovery in a Macro Model of Search and Recruiting Intensity

American Economic Journal: Macroeconomics 12(1), January 2020, 310-343 | with Liu


We show that cyclical fluctuations in search intensity and recruiting
intensity are quantitatively important for explaining the weak job recovery
from the Great Recession. We demonstrate this result using an estimated
labor search model that features endogenous search and recruiting intensity.
Since the textbook model with free entry implies constant recruiting
intensity, we introduce a cost of vacancy creation, so that firms respond to
aggregate shocks by adjusting both vacancies and recruiting intensity.
Fluctuations in search and recruiting intensity driven by shocks to
productivity and the discount factor help bridge the gap between the actual
and model-predicted job filling rate.


wp2016-09_appendix.pdf – Supplemental appendix – Replication files

Unconventional Monetary Policy and the Dollar: Conventional Signs, Unconventional Magnitudes

International Journal of Central Banking 14(5), December 2018, 103-152 | with Glick


We examine the effects of unconventional monetary policy surprises on the value of the dollar using high-frequency intraday data and contrast them with the effects of conventional policy tools. Identifying monetary policy surprises from changes in interest rate future prices in narrow windows around policy announcements, we find that monetary policy surprises since the Federal Reserve lowered its policy rate to the effective lower bound have had larger effects on the value of the dollar. In particular, we document that the impact on the dollar has been roughly three to four times that following conventional policy changes prior to the 2007-08 financial crisis.

Monetary and Macroprudential Policy in a Leveraged Economy

Economic Journal 128(609), March 2018, 797-826 | with Natal


We examine the optimal monetary policy in the presence of endogenous feedback loops between asset prices and economic activity when macroprudential policies can also be pursued. Absent macroprudential policies, the optimal monetary policy leans against asset prices and can be closely approximated, using a speed‐limit rule that responds to the growth of financial variables. An endogenous feedback loop is crucial for this result: price stability is otherwise quasi‐optimal. Similarly, a simple macroprudential rule that links reserve requirements to credit growth dampens the endogenous feedback loop and leads to near price stability. State‐contingent taxes on lending are shown to be welfare‐improving.

Are State Governments Roadblocks to Federal Stimulus? Evidence on the Flypaper Effect of Highway Grants in the 2009 Recovery Act

American Economic Journal: Economic Policy 9(2), 2017, 253-292 | with Wilson


We examine how state governments adjusted spending in response to the large temporary increase in federal highway grants under the 2009 American Recovery and Reinvestment Act (ARRA). The mechanism used to apportion ARRA highway grants to states allows us to isolate exogenous changes in these grants. We find that states increased highway spending over 2009 to 2011 more than dollar-for-dollar with the ARRA grants they received. We examine whether rent-seeking efforts could help explain this result. We find states with more political contributions from the public-works sector tended to spend more out of their ARRA highway funds than other states.

Uncertainty Shocks Are Aggregate Demand Shocks

Journal of Monetary Economics 82, September 2016, 20-35 | with Liu


Search frictions in the labor market give rise to a new option-value channel through which uncertainty affects aggregate economic activity, and the effects of which are reinforced by the presence of nominal rigidities. With these features, an increase in uncertainty resembles an aggregate demand shock because it increases unemployment and lowers inflation. Using a new empirical measure of uncertainty based on the Michigan survey and a VAR model, we show that these theoretical patterns are consistent with US data. Using a calibrated DSGE model, we show that combining search frictions and nominal rigidities can match the qualitative VAR pattern and account for about 70 percent of the empirical increase in unemployment following an uncertainty shock.


wp12-10bk_appendix.pdf – Supplemental Appendix

The International Dimension of Productivity and Demand Shocks in the US Economy

Journal of the European Economic Association 12(1), February 2014, 153-176 | with Corsetti and Dedola


This paper analyzes the cross‐country effects of productivity and demand disturbances in the United States identified with sign restrictions based on standard theory. Productivity gains in U.S. manufacturing increase U.S. consumption and investment vis‐à‐vis foreign countries, resulting in a trade deficit and higher international prices of U.S. goods, despite the rise in their supply. Financial adjustment works via a higher global value of U.S. equities, real dollar appreciation, and an expansion of U.S. gross foreign liabilities as well as assets. Positive demand shocks to U.S. manufacturing also increase investment and cause a real dollar appreciation, but have limited effects on the trade balance and net foreign assets. Our findings emphasize the importance for macroeconomic interdependence of endogenous fluctuations in aggregate demand across countries in response to business cycle shocks.

Infrastructure Spending as Fiscal Stimulus: Assessing the Evidence

Review of Economics and Institutions 5(1), Winter 2014, 1-24 | with Wilson


Transportation spending often plays a prominent role in government efforts to stimulate the economy during downturns. Yet, despite the frequent use of transportation spending as a form of fiscal stimulus, there is little known about its short- or medium-run effectiveness. Does it translate quickly into higher employment and economic activity or does it impact the economy only slowly over time? This paper reviews the empirical findings in the literature for the United States and other developed economies and compares the effects of transportation spending to those of other types of government spending.

Expectations and Economic Fluctuations: An Analysis Using Survey Data

Review of Economics and Statistics 95(4), October 2013, 1352-1367


Using survey-based measures of future U.S. economic activity from the Livingston Survey and the Survey of Professional Forecasters, we study how changes in expectations, and their interaction with monetary policy, contribute to fluctuations in macroeconomic aggregates. We find that changes in expected future economic activity are a quantitatively important driver of economic fluctuations: a perception that good times are ahead typically leads to a significant rise in current measures of economic activity and inflation. We also find that the short-term interest rate rises in response to expectations of good times as monetary policy tightens. Our results provide quantitative evidence on the importance of expectations-driven business cycles and on the role that monetary policy plays in shaping them.

Is Asia Decoupling from the United States (Again)?

Pacific Economic Review 18(3), August 2013, 345-369 | with Spiegel


The recovery from the recent global financial crisis exhibited a decline in the synchronization of Asian output with the rest of the world. However, a simple model based on output gaps demonstrates that the decline in business cycle synchronization during the recovery from the global financial crisis was exceptionally steep by historical standards. We posit two potential reasons for this exceptionally steep decline. First, financial markets during this recovery improved from particularly distressed conditions relative to previous downturns. Second, monetary policy during the recovery from the crisis was constrained in developed economies by the zero bound, but less so in Asia. To test these potential explanations, we examine the implications of an increase in corporate bond spreads similar to that which took place during the recent European financial crisis in a three-region open-economy dynamic stochastic general equilibrium model. Our results confirm that global business cycle synchronization is reduced when zero-bound constraints across the world differ. However, we find that the impact of reduced financial contagion actually goes modestly against our predictions.

Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment

In NBER Macroeconomic Annual 2012, 27, ed. by Jonathan Parker and Michael Woodford | University of Chicago Press, 2013. 89-142 | with Wilson


We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding leading to building, over several years, of public highway capital which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically.


wp12-04bk.pdf – Working Paper 2012-04
wp12-04bkAppendices.pdf – Appendices to Working Paper 2012-04

Commodity Price Movements in a General Equilibrium Model of Storage

IMF Economic Review 61(1), April 2013, 199-224 | with Arseneau


The paper embeds the canonical rational expectations competitive storage model into a general equilibrium framework thereby allowing the nonlinear commodity price dynamics implied by the competitive storage model to interact with the broader macroeconomy. The paper’s main result is that the endogenous movement in interest rates implied under general equilibrium enhances the effects of competitive storage on commodity prices. Compared with a model in which the real interest rate is fixed, the paper finds that storage in general equilibrium leads to more persistence in commodity prices and to a lower frequency of stockouts. A key mechanism driving this result is a link between the ability of the household to smooth consumption over time and the level of storage in the stochastic equilibrium. Finally, the model is used to examine the macroeconomic effects of biofuel subsidies for ethanol producers.

Central Bank Announcements of Asset Purchases and the Impact on Global Financial and Commodity Markets

Journal of International Money and Finance 31(8), December 2012, 2078-2101 | with Glick


We present evidence on the effects of large-scale asset purchases by the Federal Reserve and the Bank of England since 2008. We show that announcements about these purchases led to lower long-term interest rates and depreciations of the U.S. dollar and the British pound on announcement days, while commodity prices generally declined despite this more stimulative financial environment. We suggest that LSAP announcements likely involved signaling effects about future growth that led investors to downgrade their U.S. growth forecasts lowering long-term U.S. yields, depreciating the value of the U.S. dollar, and triggering a decline in commodity prices. Moreover, our analysis illustrates the importance of controlling for market expectations when assessing these effects. We find that positive U.S. monetary surprises led to declines in commodity prices, even as long-term interest rates fell and the U.S. dollar depreciated. In contrast, on days of negative U.S. monetary surprises, i.e. when markets evidently believed that monetary policy was less stimulatory than expected, long-term yields, the value of the dollar, and commodity prices all tended to increase.

Entry Dynamics and the Decline in Exchange-Rate Pass-Through

In Macroeconomic Performance in a Globalising Economy, ed. by R. Anderton and G. Kenny | Cambridge University Press, 2011 | with Gust and Vigfusson


The degree of exchange-rate pass-through to import prices is low. An average passthrough estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. In this paper, we model how the entry and exit decisions of exporting firms affect pass-through. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin.
Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin.

Trade Integration, Competition, and the Decline in Exchange-Rate Pass-Through

Journal of Monetary Economics 57(3), April 2010, 309-324 | with Gust and Vigfusson


Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that a significant portion of this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which trade occurs along both the intensive and extensive margins. The key element we introduce into this environment is strategic complementarity in price setting. As a result, a firm’s pricing decision depends on the prices set by its competitors. This feature implies that a foreign exporter finds it optimal to vary its markup in response to shocks that change the exchange rate, insulating import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate.

Optimal Monetary Policy and the Sources of Local-Currency Price Stability

In International Dimensions of Monetary Policy, ed. by J. Gali and M. Gertler | Chicago: University of Chicago Press, 2010 | with Corsetti and Dedola

The Adjustment of Global External Balances: Does Partial Exchange Rate Pass-Through to Trade Prices Matter?

Journal of International Economics 79(2), November 2009, 173-185 | with Gust and Sheets


This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DSGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through environment with more adjustment in a low pass-through world occurring through movements in the terms of trade rather than real trade flows and through a larger response of the exchange rate.

High Exchange-Rate Volatility and Low Pass-Through

Journal of Monetary Economics 55(6), September 2008, 1113-1128 | with Corsetti and Dedola


Two specifications of an open-economy model are shown to generate high exchange-rate volatility and low exchange-rate pass-through (ERPT). In the model, price discrimination causes ERPT to be incomplete in both the short and the long run. In the short run, a small amount of nominal rigidities is enough to reduce ERPT sharply; still, exchange-rate depreciation worsens the terms of trade, consistent with the evidence. Possible biases from omitted variables and measurement error in the ERPT empirical literature (due to data limitations) are investigated using model-generated time series. Estimates of ERPT coefficients can be quite different from true parameters and are sensitive to the shocks driving the economies. Estimates can nonetheless detect key structural features of the models.

Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism Among G7 Countries

In NBER International Seminar on Macroeconomics 2006 | Cambridge, MA: MIT Press, 2008. 117-194 | with Corsetti and Dedola


This paper investigates the international transmission of productivity shocks in a sample of five G7 countries. For each country, using long-run restrictions, we identify shocks that increase permanently domestic labor productivity in manufacturing (our measure of tradables) relative to an aggregate of other industrial countries including the rest of the G7. We find that, consistent with standard theory, these shocks raise relative consumption, deteriorate net exports, and raise the relative price of nontradables–in full accord with the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of the external account is fairly persistent, especially for the US. The response of the real exchange rate and (our proxy for) the terms of trade differs across countries: while both relative prices depreciate in Italy and the UK (smaller and more open economies), they appreciate in the US and Japan (the largest and least open economies in our sample); results are however inconclusive for Germany. These findings question a common view in the literature, that a country’s terms of trade fall when its output grows, thus providing a mechanism to contain differences in national wealth when productivity levels do not converge. They enhance our understanding of important episodes such as the strong real appreciation of the dollar as the US productivity growth accelerated in the second half of the 1990s. They also provide an empirical contribution to the current debate on the adjustment of the US current account position. Contrary to widespread presumptions, productivity growth in the US tradable sector does not necessarily improve the US trade deficit, nor deteriorate the US terms of trade, at least in the short and medium run.

International Risk Sharing and the Transmission of Productivity Shocks

Review of Economic Studies 75(2), April 2008, 443-473 | with Corsetti and Dedola


This paper shows that standard international business cycle models can be reconciled with the empirical evidence on the lack of consumption risk sharing. First, we show analytically that with incomplete asset markets productivity disturbances can have large uninsurable effects on wealth, depending on the value of the trade elasticity and shock persistence. Second, we investigate these findings quantitatively in a model calibrated to the U.S. economy. With the low trade elasticity estimated via a method of moments procedure, the consumption risk of productivity shocks is magnified by high terms of trade and real exchange rate (RER) volatility. Strong wealth effects in response to shocks raise the demand for domestic goods above supply, crowding out external demand and appreciating the terms of trade and the RER. Building upon the literature on incomplete markets, we then show that similar results are obtained when productivity shocks are nearly permanent, provided the trade elasticity is set equal to the high values consistent with micro-estimates. Under both approaches the model accounts for the low and negative correlation between the RER and relative (domestic to foreign) consumption in the data–the “Backus–Smith puzzle.”

Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility

Review of Economic Dynamics 10(4), October 2007, 595-614 | with Sill


An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in US inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally.

Self-Fulfilling Expectations and the Inflation of the 1970s: Evidence From the Livingston Survey

Journal of Monetary Economics 54(2), March 2007, 433-459 | with Sill and Stark


Using survey data on expectations, we examine whether the response of monetary policy to sudden movements in expected inflation contributed to the persistent high inflation of the 1970s. The evidence suggests that, prior to 1979, the Fed accommodated temporary shocks to expected inflation, which then led to persistent increases in actual inflation. We do not find this behavior in the post-1979 data. Among commonly cited factors, oil and fiscal shocks do not appear to have triggered an increase in expected inflation that eventually resulted in higher actual inflation.

An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies

International Finance 9(1), Spring 2006, 37-61 | with Croke and Kamin


Much has been written about prospects for US current account adjustment, including the possibility of what is sometimes referred to as a ‘disorderly correction’: a sharp fall in the exchange rate that boosts interest rates, depresses stock prices and weakens economic activity. This paper assesses some of the empirical evidence bearing on the plausibility of the disorderly adjustment scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during and after the onset of adjustment, building on the analysis of Freund (2000).

We found little evidence among past adjustment episodes of the features highlighted by the disorderly adjustment hypothesis. Although some episodes in our sample experienced significant shortfalls in GDP growth after the onset of adjustment, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates or declines in real stock prices. By contrast, it was among the episodes where GDP growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred. These findings do not preclude the possibility that future current account adjustments could be disruptive, but they weaken the historical basis for predicting such an outcome.

A Quantitative Analysis of Oil-Price Shocks, Systematic Monetary Policy, and Economic Downturns

Journal of Monetary Economics 51(4), May 2004, 781-808 | with Sill


Are the recessionary consequences of oil-price shocks due to oil-price shocks themselves or to the monetary policy that responds to them? We investigate this question in a calibrated general equilibrium model in which oil use is tied to capital utilization. The response to an oil-price shock is examined under a variety of monetary policy specifications. Under our benchmark calibration, which approximates the Federal Reserve’s behavior since 1979, monetary policy contributes about 40 percent to the drop in output following a rise in oil prices. Moreover, none of the commonly proposed policies we examine completely offsets the recessionary consequences of oil shocks.

A Quantitative Analysis of Currency Regimes

In Exchange-Rate Dynamics, ed. by J.O. Hairault | Oxford: Routledge, 2004 | with Dedola

Incomplete Markets, Borrowing Constraints, and the Foreign Exchange Risk Premium

Journal of International Money and Finance 21(7), December 2002, 957-980


This paper solves a model consisting of two monetary economies with incomplete markets, in which agents are subject to borrowing constraints. The paper investigates if such a framework is able to account for the volatility and the size of the foreign exchange risk premium. The model succeeds in increasing substantially the volatility of the risk premium to about 30% of that in the data. However, this more volatile risk premium does not translate into sufficiently large predictable excess returns. It thus appears unlikely that excess returns from currency speculation can be uniquely explained by a time-varying risk premium in an incomplete-markets economy with exogenous borrowing constraints.

Why Is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes?

International Journal of Finance and Economics 6(4) , October 2001, 401-419 | with Dedola


Since the adoption of flexible exchange rates, real exchange rates have been much more volatile than they were under Bretton Woods. However, the volatilities of most other macroeconomic variables have remained approximately unchanged. This poses a puzzle for standard international business cycle models. This paper develops a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price due to firms setting prices in buyers’ currencies. By partially insulating goods markets across countries and thus mitigating the international expenditure-switching effect, this pricing behavior is found to considerably dampen the responses of quantities to shocks hitting the economies therefore helping to account for the puzzle.

FRBSF Publications
Are Markups Driving the Ups and Downs of Inflation?

Economic Letter 2024-12 | May 13, 2024 | with Li and Liu

From Hiring Difficulties to Labor Hoarding?

Economic Letter 2023-32 | December 18, 2023 | with Oliveira

Will a Cooler Labor Market Slow Supercore Inflation?

Economic Letter 2023-18 | July 12, 2023 | with Wilson and Zhao

Will Workers Demand Cost-of-Living Adjustments?

Economic Letter 2022-21 | August 8, 2022 | with Glick and Pepper

Watch FOMC Rewind Live—Conversations Breaking Down Fed Policy Announcements

SF Fed Blog | Apr 2022

How Are Businesses Responding to Climate Risk?

Economic Letter 2022-06 | March 21, 2022 | with Jargalsaikhan and Oliveira

Understanding Climate Risk: What We Learned from Businesses

SF Fed Blog | Mar 2022 | with Jargalsaikhan and Oliveira

Do Households Expect Inflation When Commodities Surge?

Economic Letter 2021-19 | July 12, 2021 | with Glick, Kouchekinia, and Liu

Average-Inflation Targeting and the Effective Lower Bound

Economic Letter 2020-22 | August 10, 2020 | with Diwan and Mertens

COVID-19 and CO2

Economic Letter 2020-18 | July 6, 2020 | with Hale

The Uncertainty Channel of the Coronavirus

Economic Letter 2020-07 | March 30, 2020 | with Liu

Is the Risk of the Lower Bound Reducing Inflation?

Economic Letter 2020-05 | February 24, 2020 | with Amano and Carter

Is Job Automation Keeping Down Wages?

SF Fed Video | Feb 2020 | with Liu

Are Workers Losing to Robots?

Economic Letter 2019-25 | September 26, 2019 | with Liu

Why Is the Federal Reserve’s Balance Sheet Still So Big? Our Animated Economic Letter Explains

SF Fed Blog | Sep 2019 | with Foerster

Why Is the Federal Reserve’s Balance Sheet Still So Big?

SF Fed Video | Sep 2019 | with Foerster

Why Is the Fed’s Balance Sheet Still So Big?

Economic Letter 2019-16 | June 3, 2019 | with Foerster

Does Ultra-Low Unemployment Spur Rapid Wage Growth?

Economic Letter 2019-02 | January 14, 2019 | with Marti and Wilson

Has the Wage Phillips Curve Gone Dormant?

Economic Letter 2017-30 | October 16, 2017 | with Wilson

The Elusive Boost from Cheap Oil

Economic Letter 2016-13 | April 18, 2016 | with Moran and Vigfusson

Does Slower Growth Imply Lower Interest Rates?

Economic Letter 2014-33 | November 10, 2014 | with Rudebusch

Fueling Road Spending with Federal Stimulus

Economic Letter 2014-25 | August 25, 2014 | with Wilson

Slow Business Start-ups and the Job Recovery

Economic Letter 2014-20 | July 7, 2014 | with Laderman

Uncertainty and the Slow Labor Market Recovery

Economic Letter 2013-21 | July 22, 2013 | with Liu

Unconventional Monetary Policy and the Dollar

Economic Letter 2013-09 | April 1, 2013 | with Glick

Highway Grants: Roads to Prosperity?

Economic Letter 2012-35 | November 26, 2012 | with Wilson

Uncertainty, Unemployment, and Inflation

Economic Letter 2012-28 | September 17, 2012 | with Liu

Are Large-Scale Asset Purchases Fueling the Rise in Commodity Prices?

Economic Letter 2011-10 | April 4, 2011 | with Glick

Confidence and the Business Cycle

Economic Letter 2010-35 | November 22, 2010

Disagreement about the Inflation Outlook

Economic Letter 2009-31 | October 5, 2009 | with Rudebusch and Weidner

Fighting Downturns with Fiscal Policy

Economic Letter 2009-20 | June 19, 2009

Other Works
Why Is the Fed’s Balance Sheet Still So Big?

Slide presentation to Council on Economic Education, 2019

A Progress Report on the Economy

Bank of Canada speech to Association des economistes quebecois and CFA Quebec, 2018

Seeking Gazelles in Polar Bear Country

Bank of Canada speech to Sherbrooke Chamber of Commerce, 2017

Upgrading the Payments Grid: The Payoffs Are Greater Than You Think

Bank of Canada speech to Payments Canada, 2017

Opening Statement Before the House of Commons Standing Committee on Finance

Bank of Canada speech to the House of Commons Standing Committee on Finance, 2017

Optimal Monetary Policy in Open Economies

In Handbook of Monetary Economics, 3(16), ed. by M. Woodford and B.M. Friedman | Elsevier, 2010. 861-933 | with Corsetti and Dedola


This chapter studies optimal monetary stabilization policy in interdependent open economies, by proposing a unified analytical framework systematizing the existing literature. In the model, the combination of complete exchange-rate pass-through (`producer currency pricing’) and frictionless asset markets ensuring efficient risk sharing, results in a form of open-economy `divine coincidence’: in line with the prescriptions in the baseline New-Keynesian setting, the optimal monetary policy under cooperation is characterized by exclusively inward-looking targeting rules in domestic output gaps and GDP-deflator inflation. The chapter then examines deviations from this benchmark, when cross-country strategic policy interactions, incomplete exchange-rate pass-through (‘local currency pricing’) and asset market imperfections are accounted for. Namely, failure to internalize international monetary spillovers results in attempts to manipulate international relative prices to raise national welfare, causing inefficient real exchange rate fluctuations. Local currency pricing and incomplete asset markets (preventing efficient risk sharing) shift the focus of monetary stabilization to redressing domestic as well as external distortions: the targeting rules characterizing the optimal policy are not only in domestic output gaps and inflation, but also in misalignments in the terms of trade and real exchange rates, and cross-country demand imbalances.

The Role of China in Asia: Engine, Conduit, or Steamroller?

In The Future of Asian Trade and Growth: Economic Development with the Emergence of China, ed. by Linda Yueh | Routledge, 2009