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,

Most available results on optimal decisions under partial information are derived under “separation”. But this principle does not always hold. We derive a non-standard first order condition of optimality from first principles when signal extraction and optimal policy must be jointly determined. This allows us to solve a model of optimal fiscal policy where separation does not apply. Tax smoothing prevails

We use a standard dynamic factor model to extract new factors based on the real-time flow of accounting data from the corporate financial reports. The extracted accounting factors exploit across-sector comovements in corporate value creation drivers and can be used together with other closely watched economic indicators. We show that our weekly updated accounting factors are incrementally relevant

Safe assets (liquidity) can be created by an economy’s private banking system and also by its government. Our model shows that some banks create liquidity with low debt and efficient loan monitoring while other banks use high, tranched debt and inefficient loan monitoring. Government liquidity can also differ, either by the government directly issuing debt or by insuring bank deposits. Directly issued

Financial regulation imposes equity buffers on banks by restricting dividends. This paper studies constrained-efficient dividend policy when banks fund loans with equity and debt. In the model, bank shareholders consider equity costly and a bank’s access to debt depends on its shareholder value. In response to loan losses banks cut dividends, but eventually defer dividends too much. They do not internalize

Evidence from monetary VARs suggests that in the U.S., Canada, and the U.K. the impact of monetary shocks on real house prices is about three to five times as large as that on real GDP. Although these trade-offs are not manifestly unfavorable, in the light of the large differences in the magnitudes of house prices and GDP fluctuations, a monetary policy of leaning against the former would inevitably

We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call “risk shifts”, are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion’s share of stock price movements around FOMC announcements; (ii) that they are accompanied by significant investor fund

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

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

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

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

We propose a novel two-agent New Keynesian model to study the interaction of fiscal policy and household heterogeneity in a tractable environment. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model is consistent with micro data on empirical intertemporal marginal propensities to consume, and it avoids

Data from millions of appraisals in 2012–2019 are used to estimate residential land prices, the share of house value attributable to land, and related statistics down to the census-tract level for areas that include the vast majority of U.S. population and single-family housing. The results confirm predictions about land prices from canonical urban models. Over 2012–2019, we show that land prices rose

Central banks’ disclosures, such as forward guidance, have a weaker effect on the economy in reality than that predicted in theoretical models. In a beauty contest with information acquisition, we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents' equilibrium level of attention, which, in turn, increases the weight assigned to the disclosures

A reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks’ exposure

The money-consumption ratio increases with age and decreases with consumption, and the recent era of low interest rates has seen a large increase in the aggregate money-consumption ratio. We estimate an overlapping generations model with money for transaction purposes for the age effects and the extent of financial innovation using aggregate and household-level money holdings. We then assess the welfare

In response to an adverse labor-market shock, a calibrated heterogeneous-agent model predicts that aggregate spending on durable goods falls mainly due to the ex-ante increase in income uncertainty caused by higher unemployment risk. In contrast, aggregate spending on nondurable goods falls mainly due to the ex-post income losses associated with realized unemployment spells. When households hold little

We develop a U.S. monetary policy shock series that stably bridges periods of conventional and unconventional policymaking, is largely unpredictable, and contains no significant central bank information effect. We attribute differences between our measure and often-used alternatives to our econometric procedure, a partial least squares approach, and our using the full maturity spectrum of interest

We conduct an out-of-sample backtesting exercise of Growth-at-Risk (GaR) predictions for 24 OECD countries. We consider forecasts constructed from quantile regression and GARCH models. The quantile regression forecasts are based on a set of recently proposed measures of downside risks to GDP, including the national financial conditions index. The backtesting results show that quantile regression and

Agents have foresight when they receive information about a random process above and beyond the information contained in its current and past history. In this paper, we propose an information-theoretic measure of the quantity of foresight in an information structure, and show how to separate informational assumptions about foresight from physical assumptions about the dynamics of the processes itself

The mix of inflation and income taxation that governments adopt vary considerably across countries. We take a Ramsey optimal-policy approach to explain these differences, focusing on the institutions of the country, modeled as the difficulty of tax evasion, as the key variation across countries. In the model households optimally choose the extent of informal activity and a benevolent government optimally

Introducing bank reserves (or money) into the basic New Keynesian (NK) model offers a resolution of NK puzzles and paradoxes. The resulting models deliver local-equilibrium determinacy under an exogenous interest rate on reserves and an exogenous nominal stock of reserves, even for an arbitrarily small monetary friction. This leads to a resolution of the forward-guidance puzzle, the fiscal-multiplier

Regression discontinuity estimates indicate that home buying is highly responsive to interest rates in a large segment of the population. A surprise 50 basis point cut in the effective interest rate for mortgages insured by the Federal Housing Administration (FHA) led to an immediate 14 percent increase in home buying among the FHA-reliant population. We show that this large, extensive-margin effect

The methods of Gürkaynak et al. (2005a) are extended to separately identify surprise changes in the federal funds rate, forward guidance, and large-scale asset purchases (LSAPs) for each FOMC announcement from July 1991 to June 2019. Forward guidance and LSAPs had substantial and highly statistically significant effects on Treasury yields, corporate bond yields, stock prices, and exchange rates, comparable

Demand shocks lower firm financing premiums by increasing the present value of cash-flow, thereby easing firm financing constraints. We study the effects of unanticipated federal spending shocks on firm investment in the United States using a novel panel dataset that combines federal procurement contracts with key financial firm-level information. Consistent with the financial accelerator model, our

Low-skilled prime-age men are less likely to be employed than high-skilled prime-age men, and the differential has increased since the 1970s. I build a search model encompassing three explanations: (1) automation and trade reduced the demand for low-skilled workers; (2) health, welfare, and recreational gaming/computer technology reduced the supply of low-skilled workers; and (3) factors affecting

This paper analyzes optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks’ capital position. It warns, however, that the policy can remain ineffective after non-financial shocks and might offer no substitute

Input-output linkages facilitate expectations-driven fluctuations. Signals about yet-to-be-realized aggregate (macro) and idiosyncratic (micro) fundamentals in the future affect current equilibrium outcome through chains of input needs when inputs require time to build. Depending on their importance on these chains, firms respond differently to common signals. The network structure, together with input

We examine the role of fiscal policy in accounting for the remarkable rise of Ireland from one of Western Europe’s poorest countries to one of its richest in just a few years. We focus on the importance of business tax reform and overall changes in fiscal policy, in conjunction with other factors, which we model as a residual rise in Total Factor Productivity (TFP). We conduct our analysis using a