Research Webpage

Link to my CV (updated November 2012)

Published Papers

·         Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle

(American Economic Journal: Macroeconomics, July 2012, Vol. 4(3))

-          online appendix

Abstract: High-interest-rate currencies tend to appreciate in the future relative to low-interest-rate currencies instead of depreciating as uncovered-interest-parity (UIP) predicts. I construct a model of exchange-rate determination in which ambiguity-averse agents face a dynamic filtering problem featuring signals of uncertain precision. Solving a max-min problem, agents act upon a worst-case signal precision and systematically underestimate the hidden state that controls payoffs. Thus, on average, agents next periods perceive positive innovations, which generates an upward re-evaluation of the strategy's profitability and implies ex-post departures from UIP. The model also produces predictable expectational errors, negative skewness and time-series momentum for currency speculation payoffs.

·         Monetary Policy and Stock Market Booms, with Lawrence Christiano, Roberto Motto, Massimo Rostagno,

(in Macroeconomic Challenges: the Decade Ahead, Federal Reserve Bank of Kansas City, Policy Symposium, Jackson Hole Wyoming, 2010).

Abstract: Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.

Working Papers:

·         Monetary/Fiscal Policy Mix and Agents’ Beliefs, with Francesco Bianchi

(revise and resubmit, Journal of Political Economy)

Abstract: We estimate a model for the US economy allowing for a switch from a non-Ricardian to a Ricardian regime. We find that the switch occurred in mid-1980 and we highlight the following results. First, if the Ricardian regime had been in place since 1955 or if agents had anticipated the switch, the Great Inflation would not have occurred and debt would have been higher. Second, the increase in the debt-to-GDP ratio, the drop in inflation, and the recession of the early '80s are explained by the regime change itself. Third, the regime switch accounts for the break in inflation persistence.

·         Ambiguous Business Cycles, with Martin Schneider

(revise and resubmit, American Economic Review)

Abstract: This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents' lack of confidence in probability assessments. While modeling changes in risk typically requires higher-order approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using first-order approximations. In our estimated medium-scale DSGE model, a loss of confidence about productivity works like ‘unrealized' bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.

·         Evidence for Dynamic Contracts in Sovereign Bank Lending, with Peter Benczur

Abstract: This paper presents direct evidence for self-enforcing dynamic contracts in sovereign bank lending. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems on current spreads (a ‘punishment’ effect in prices) from an indirect effect through higher expected future default probabilities. Such a punishment provides positive surplus to lenders after a default, a feature that characterizes dynamic contracts. Using data on bank loans to developing countries between 1973-1981 and constructing continuous variables for credit history, we find evidence that most of the influence of past repayment problems is through the direct, punishment channel.

·         Monetary Policy and Stock Market Boom-Bust Cycles, with Lawrence Christiano, Roberto Motto, Massimo Rostagno (2008,  European Central Bank Working Paper No. 955).

Abstract: We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to such a news shock, in a standard real business cycle model. However, a monetized version of the model which stresses sticky wages and an inflation-targeting monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations.

Work in progress:

·         Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle, with Francesco Bianchi and Martin Schneider

Abstract: This paper studies a DSGE model with endogenous financial asset supply and ambiguity averse investors. An increase in uncertainty about financial conditions leads firms to substitute away from debt and reduce shareholder payout in bad times when measured risk premia are high. Regime shifts in volatility generate large low frequency movements in asset prices due to uncertainty premia that are disconnected from the business cycle.

Discussions:

·         Discussion of “A Gains from Trade Perspective on Macroeconomic Fluctuations”, by Paul Beaudry and Franck Portier, Joint Central Bank Conference (Paris, 2012)

·         Discussion of “Economic Growth with Bubbles”, by Alberto Martin and Jaume Ventura, Joint Central Bank Conference (Zurich, 2011)

·         Discussion of “Uncertainty Shocks in a Model of Effective Demand”, by Susanto Basu and Brent Bundick, NBER Workshop on Methods and Applications for DSGE Models (Philadelphia Fed, 2011)

·         Discussion of “Man-Bites-Dog Business Cycles” by Kristoffer Nimark, CEPR European Summer Symposium in International Macroeconomics (Gerzensee, 2011)

·         Discussion of “Firm Risk and Leverage-Based Business Cycles”, by Sanjay Chugh, NBER Workshop on Methods and Applications for DSGE Models (Atlanta Fed, 2010)