We characterize optimal monetary policy when agents learn about endogenous asset prices. Learning leads to inefficient asset price fluctuations and distortions in consumption and investment decisions. We find that the policy-relevant natural real interest rate increases with subjective asset price beliefs. Optimal monetary policy raises interest rates when expected capital gains are high, but does

We introduce a unified deep learning method that solves dynamic economic models by casting them into nonlinear regression equations. We derive such equations for three fundamental objects of economic dynamics – lifetime reward functions, Bellman equations and Euler equations. We estimate the decision functions on simulated data using a stochastic gradient descent method. We introduce an all-in-one

The ratio estimator of the markup is the ratio of the output elasticity for a flexible input to that input’s cost share in total revenue. We highlight identification and estimation issues pertaining to this ratio estimator, when firm-level output prices are not observed. If the revenue elasticity for a flexible input is used in place of the output elasticity, then profit maximization implies that the

The concentration of US imports is studied from transaction-level data. Concentration has fallen in the typical industry, while it is stable by industry-origin. Falling concentration is driven by the extensive margin: the number of exporting firms has grown, and the number of exported products has fallen relatively more for top firms. Instead, average revenue per product of top firms has increased

To study the dynamic effects of antitrust policy on growth and welfare, we develop and estimate the first general equilibrium model with Schumpeterian innovation, oligopolistic product market competition, and endogenous M&A decisions. The estimated model reveals that: (1) Existing policies generate gains in growth and welfare. (2) Strengthening antitrust enforcement could deliver substantially higher

Cavenaile et al. (2021) study the long-run implications of anti-trust policy for innovation, output and welfare using a general equilibrium model. Their approach differs from the much of the existing literature that focuses on short-run, partial equilibrium effects. Their model combines three key elements: (i) endogenous growth with vertical innovations; (ii) oligopolistic competition in the product

In U.S. firm-level data, large firms increase their spending on customer capital significantly more than small firms following an interest rate decline. We interpret this evidence in a model with product market frictions where heterogeneous firms strategically advertise to build a customer base. When a firm advertises, it shifts customers’ demand away from competitors. This externality is especially

Regulatory debates about centralized trading assume security design is immune to market structure. We consider a regulator who introduces an exchange to increase liquidity, understanding that security design is endogenous. For a given security, investors would like to trade in a larger market and, for a given market structure, they would like to trade a safer security. We show that financial intermediaries

The interaction between interest rates and banks’ market power generates a motive for bank risk-taking. Low interest rates depress bank profits from the deposit market as competition from cash intensifies. Limited liability and the consequent low bank market value move banks closer to the convex region of their payoff function and thus lead to more risk-taking. We estimate a model that embodies this

Price selection is a simple, model-free measure of selection in price setting. It exploits comovement between inflation and the level from which adjusting prices departed. Prices that increase from lower-than-usual levels tend to push inflation above average. Using micro data for the United Kingdom, the United States, and Canada, we find strong price selection at disaggregate levels. Price selection

This paper studies the dollarization of prices in retail markets of emerging economies. We develop a model of the firm’s optimal currency choice in retail markets in inflationary economies. We derive theoretical predictions regarding the optimality of dollar pricing, and test them using data from the largest e-trade platform in Latin America. Across countries, price dollarization is positively correlated

The decline in middle-wage occupations and rise in automation over the last decades is at the center of policy discussions. We develop an empirically relevant general equilibrium model that features endogenous labor force participation, occupational choice, and automation capital. We use the model to consider two types of policies: the retraining of workers who were adversely affected by automation

Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for

Andrade et al. analyze the data from a large panel of firms and show how sector-specific shocks erroneously influence firms’ outlooks about the aggregate economy. This paper is part of a broader research agenda that has extensively documented the existence of information rigidities using data from large-scale surveys of households and firms. This comment discusses the implications of this research

We propose a mechanism that explains standard stylized facts in both international macroeconomics and international finance. To do so, we develop a New Keynesian DSGE model with financial frictions à la Bernanke et al. (1999), in which we depart from the full-information rational expectations (FIRE) assumption. The key ingredient is home information bias (HIB) in expectations. While the FIRE model

We compare the findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers find QE to be more effective than academic papers do. Central bank papers report larger effects of QE on output and inflation. They also report QE effects on output that are more significant, both statistically and economically

Using a database on U.S. individuals and households, we examine whether rise in globalization and trade integration of product markets have contributed to the observed decline in US entrepreneurship in trade-exposed sectors. US trade policy that lowered tariffs on China dampens entrepreneurial dynamism through lower entry (especially by incorporated entrepreneurs) and higher exit in exposed sectors

Many observers have argued that the fall in RMBS prices during the crisis was partly caused by fire sales. Using a unique dataset of RMBS transactions for insurance companies, we show evidence supportive of a role, at the transaction level, of forced sales that occurred at discounted prices relative to fundamentals, and find that the RMBS market behaved as a whole as would be expected in the presence

Using a survey of French manufacturing firms, we study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions. In response to industry-level shocks that have no aggregate effects, firms’ aggregate expectations respond persistently. This is consistent with “island” models in which firms use the local prices they observe to make inferences about broader aggregate

The optimal design of a central bank digital currency (CBDC) is analyzed in an environment where agents sort into cash, CBDC, and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of a payment instrument depend on the number of its users. A CBDC can be designed with attributes similar to cash or deposits, and can be interest bearing:

Using a granular model of international trade, we study the rationale and implications of various government interventions targeted at large individual firms. In antitrust regulation, governments face an incentive to be overly lenient towards domestic mergers in comparative advantage sectors. In trade policy, targeting individual foreign exporters rather than entire sectors minimizes the pass-through

This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms’ output share. Firms want to get bigger

In self-confirming crises lenders charge high interest rates wrongly believing that lower rates would generate losses. In a directed-search economy, misperceptions can persist because there is no equilibrium evidence that can confute it, preventing constrained-efficiency. A policy maker with the same beliefs as lenders will find it optimal to offer a contingent subsidy to induce lower market rates

This paper offers novel econometric evidence on the contribution of production networks to the effect of monetary shocks on real macroeconomic variables. In particular, we construct a highly disaggregated monthly dataset on US final sectoral consumption to estimate that at least 30% of the effect of monetary shocks on aggregate consumption comes from amplification through input-output linkages, which

The 2006–09 US housing crisis had scarring local effects. For a given county, a housing shock generating a 10% reduction in housing wealth from 2006 through 2009 led to a 4.4% decline in employment by 2018 and a commensurate decline in value added. This persistent local effect occurred despite the shock having no significant impact on labor productivity. The local labor market adjustment to the housing

The U.S. government guarantees a majority of residential mortgages to promote homeownership. This paper uses property-level data to estimate the effect of government guarantees on homeownership and other housing market outcomes, by exploiting variation of the conforming loan limits (CLLs) along county borders. We find that CLL changes had effects on government guarantees, house prices, house sales

Do the benefits of central bank transparency depend on the structure of financial markets? We address this question in a two-country model with dispersed information among price-setting firms. The volatility of the real exchange rate is non-monotonic in the precision of public communications. Despite this non-monotonicity, under complete markets, greater provision of public information always improves

Central bank communication about financial stability causally affects individuals’ beliefs and risk-taking behavior, consistent with an expectations channel of financial stability communication. Individuals receiving a warning from the central bank in a randomized information experiment expect a higher probability of a financial crisis and reduce their demand for risky assets. This reduction is driven

The introduction of digital price tags and e-commerce facilitates the implementation of price adjustments and thereby diminishes the degree of nominal rigidity in an economy. Is this phenomenon welfare-improving? We address this question using a multi-sector New Keynesian model with information frictions and dispersed beliefs. Increased price flexibility may decrease welfare through the dispersed belief

The convention in the news media is to announce a recession if a country experiences two consecutive quarters of negative growth. We exploit the arbitrary threshold implied by this practice to identify the economic impact of recession announcements through a Regression Discontinuity Design (RDD). Estimation results show that news of a recession leads to a discontinuous fall in consumer confidence,