I consider the role of news provided by the media as signals used by investors to learn about partisan conflict. Higher partisan conflict induces uncertainty (by increasing the probability of crises) and gridlock (making tax reforms less likely), both affecting investment returns. The true degree of political disagreement is unobservable to investors, who create expectations based on the observation

How do macroeconomic events affect the term structure of equity returns? We document that the term structure of equity excess returns is upward sloping on federal fund rate announcement days but not on nonannouncement days. The dividend strips respond significantly to macroeconomic news and the strength of the announcement response declines with the maturity of the dividend asset. Our analysis reveals

The multinational syndicated loan market has crossed the $7 trillion threshold. Prior literature argues that weak borrower country's creditor rights is the main limiting factor to cross-border lending. We find that lender country's creditor rights can partly substitute for weak borrower creditor rights if a lender is from a better creditor rights country. Our results are robust to controlling for a

We study how individual banks borrow and lend in the euro unsecured and secured interbank market. We find that banks with lower credit worthiness replace unsecured with secured borrowing, which is consistent with a reduction in the supply of unsecured loans rather than a lower demand for funding. Riskier lenders replace unsecured with secured lending, suggesting that banks take precautionary measures

We consider an arbitrage strategy that exactly replicates the cash flow of a sovereign nominal bond using inflation swaps and inflation-linked bonds. The strategy reveals a violation of the law of one price in the G7 countries, which is largest for the eurozone. Testing the strategy's exposure to deflation, volatility, liquidity, and macro-economic risks shows the observed mispricing is a risk premium

Official statistics measuring the cost of living are known to suffer from several biases. This paper shows that the size of the biases can vary with economic conditions. Using homescan data, it is first confirmed that official price indexes can be tracked using such granular data sets. While the often-acknowledged substitution bias is shown to be relatively small, neglected preference adjustment and

This paper analyzes the dynamics of full-time and part-time employment over the business cycle. We first document basic macroeconomic facts on these employment stocks using the U.S. data and decompose their cyclical dynamics into the contributions of different flows into and out of these stocks. Second, we develop and estimate a New Keynesian search-and-matching model with a segmented labor market

We study an economy in which money and credit serve as a means of payment and the settlement of credit requires money. The model extends recent developments in microfounded monetary theory to address the choice of payment methods and the effects of inflation. Whether a buyer uses money or credit depends on the fixed cost of credit and the inflation rate. In particular, inflation not only makes money

In this paper, we focus on the transmission mechanism of quantitative-easing (QE) policy and address which matters most: the size of the bond purchases in each period (flow effects) or the total amount of bonds taken away from the private sectors (stock effects). To this end, we estimate a dynamic stochastic general equilibrium (DSGE) model in which short- and long-term bonds are imperfect substitutes

Bank failures are generally liquidity as well as solvency events. Whether it is households running on banks or banks running on banks, defunding episodes are full of drama. This theater has, arguably, lured economists into placing liquidity at the epicenter of financial collapse and liquidity provision as opposed to improved intermediation as the rationale for banks. But loss of liquidity describes

Consumer debt is an important vehicle for smoothing through income shocks. I study localized income shocks from oil and gas development to investigate consumer response. Using quarterly information on consumer debt and oil and gas activity between 2000 and 2016, I find that consumer debt increased at a peak of $660 per capita, equivalent to 1.3% of median household income in counties with shale endowment

The response of Canadian housing markets to oil price shocks provides strong evidence that shocks to the demand for housing that originate in one region also raise house prices in other regions. We develop a theoretical model that helps understand this finding. The model differentiates between oil-producing and nonoil-producing regions and incorporates multiple sectors, trade between provinces, government

We investigate how the surprise introduction of negative interest rate policy (NIRP) in Japan affected banks' lending and risk-taking behavior. Equity prices of Japanese financial firms fell sharply despite the accommodative policy, and we document the characteristics that heighten Japanese banks' exposure to NIRP. We exploit the cross-sectional variation in the change of share prices around the announcement

This paper examines the implications of interacting pricing frictions, labor market frictions, and consumption risk by comparing variants of a New Keynesian model. The model variants make alternative assumptions about whether hiring and pricing decisions occur within the same firm or across different firms, and whether workers pool income. Each model implies the same contract is offered to workers

We analyze contract-level data on approved and rejected microloans to assess the impact of a new credit registry in Bosnia and Herzegovina, a country with a competitive microcredit market. Our findings are threefold. First, information sharing reduces defaults, especially among new borrowers, and increases the return on lending. Second, lending tightens at the extensive margin as loan officers, using

We derive a parsimonious equilibrium three-factor asset pricing model (cross-sectional CAPM, CS-CAPM) in which the realized cross-sectional second and third moments of long-short equity portfolio returns are the driving forces in terms of pricing cross-sectional equity risk premia. Stock market segmentation implies that these two (nonmarket) factors are priced in equilibrium. The three-factor model

We investigate the evidence for structural breaks in autoregressive models of U.S. macroeconomic time series. There is substantial model uncertainty associated with such models, including uncertainty related to lag selection, the number of structural breaks, and the specific parameters that break. We develop a feasible approach to Bayesian model averaging, where the model space encompasses these sources

We show that consumption expenditures for older households are more responsive to monetary policy shocks than for young- or middle-aged households. A one-standard-deviation expansionary monetary policy shock induces a statistically significant and quantitatively large (1.7%) increase in aggregate consumption for old households over the ensuing 3 years. The responses for young- and middle-aged households

The country risk premium predicted by the dynamic real business cycle models in emerging markets is procyclical, whereas it is countercyclical in the data. This paper proposes a model in which a time-varying risk premium emerges endogenously through a variant of the Bernanke–Gertler–Gilchrist financial accelerator mechanism. The estimated model can account for the volatility and the countercyclicality

This paper presents a new reason why countries may want to keep separate currencies rather than form a currency union. In a search model of a two-country world, keeping multiple currencies with trade restrictions that favor the use of the domestic currency in domestic goods markets is socially beneficial relative to forming a currency union or letting multiple currencies circulate in all countries

Recent developments in the asset pricing literature show that a combination of technology and distributive shocks can rationalize observed risk premia when firm ownership is concentrated in the hands of few households. We find that distributive shocks are unnecessary when nominal price rigidity is taken into account. Our results are driven by the income redistribution associated to procyclical variations

What are the effects of labor market policies when the economy is sliding into a deep recession? We show that public announcements asking firms not to cut wages under H. Hoover during 1929–33 postponed entering the zero lower bound episode and reduced its duration. We develop and estimate a medium scale New Keynesian model to measure the effect of Hoover policies during the Great Depression and we

We investigate the impact of mass layoff announcements on industry rivals and find that investors perceive layoff announcements as news about industry prospects. When a layoff announcement conveys good (bad) news for the announcer, rivals on average witness a 0.51% increase (0.65% decrease) in cumulative abnormal stock returns. To explain this industry effect, we test a “growth opportunities” channel

This paper proposes a sticky inflation model in which inflation persistence is endogenously generated from the optimizing behavior of forward-looking firms. Although firms change prices periodically, their ability to fully adjust them in response to changes in economic conditions is assumed to be constrained due to the presence of managerial and customer costs of price adjustment. Our findings strongly

We show that for the United States and Australia consumers expect significantly lower inflation when the political party they support holds executive office. This finding cannot be explained by previously documented sources of heterogeneity in consumer inflation expectations. It is consistent with stereotypical thinking (Bordalo et al. 2016), pointing to the use of heuristics in the formation of macro‐economic

This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing—such as the zero lower bound (ZLB). To this end, we build a model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are

What are the tradeoffs that the public is willing to accept between inflation and unemployment? We find that people dislike extra points of unemployment more than extra points of inflation. This is true for both Europe and Latin America. For the latter, the aversion to unemployment relative to inflation is much greater. Moreover, in both regions, the poor's distaste for extra points of unemployment

We compare news in Twitter with traditional news outlets and emphasize their differential impact on Eurozone's sovereign bond market. We reveal a two‐way information flow between Twitter's “Grexit” tweets and “Grexit” mentions in traditional news which suggests not only that both types of news serve as important empirical predictors for the sovereign bond market but also that the “old” (traditional

We suggest a new mechanism—the liquidity insurance channel—based on the widespread reliance of high credit quality firms on bank credit lines for liquidity management. Our model matches the patterns of usage of loans and credit lines in the cross-section of firms and defines the conditions under which shocks to bank health affect primarily low or high credit quality firms. Our framework can explain

This paper asks whether the sensitivity of market long-term interest rates and credit ratings is associated with cross-country differences in social trust. We note a number of theoretical mechanisms that suggest that macroeconomic shocks are more likely to be effectively dealt with in higher-trust societies. A set of panel estimates across middle- and high-income countries reveals that interest rates