Job Market Paper
Inflation Persistence, Noisy Information and the Phillips Curve
[Appendix] [Online Appendix]
Presented at the EEA-ESEM 2021 Congress, CEBRA 2021 Annual Meeting, the 11th RCEA Money, Macro & Finance Conference, the 9th UECE Conference on Economic and Financial Adjustments
Abstract: Inflation persistence and volatility have fallen since the mid 80s. Using micro-data from US Professional Forecasters on inflation expectations, I show that the gradual increase in public disclosure of US Fed actions and predictions have significantly reduced the anchoring in firm inflation expectations, affecting inflation dynamics. I show that an extended version of the New Keynesian model which relaxes the Full Information Rational Expectations assumption generates the documented fall in persistence. I find that whereas in the benchmark model the disconnection between inflation and the real side of the economy can only be due to a fall in the slope of the Phillips curve, in the noisy information setting it is the result of a change in beliefs. Once the misspecification in the benchmark Phillips curve is corrected, there is no empirical evidence of a change on its slope.
Publications
Monetary Policy and Liquidity Constraints: Evidence from the Euro Area with Mattias Almgren (IIES Stockholm), John Kramer (IIES Stockholm) and Ricardo Lima (IIES Stockholm).
[Pre-publication Draft] [Replication Package]
Forthcoming at AEJ: Macroeconomics
Presented at: Stockholm University, IIES Stockholm, Warwick University, Queen Mary University of London, Stanford, Yale, MIT, Harvard, and Università Bocconi.
Media Coverage: Nada es Gratis (in spanish).
Abstract: We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity constrained households. We do so in the context of the euro area using a Local Projections Instrumental Variables estimation. We construct an instrument for changes in interest rates from changes in overnight indexed swap rates in a narrow time window around ECB announcements. Monetary policy shocks have heterogeneous effects on output across countries. Using micro data, we show that the elasticity of output to monetary policy is larger in countries that have a larger fraction of households that are liquidity constrained.
Working Papers
HANK beyond FIRE
Presented at IIES Stockholm, Oxford NuCamp Virtual Workshop, Nordic Junior Macro Virtual Series, UCL Enter Seminar, and Norges Bank Macro Modelling Workshop.
Abstract: The transmission channel of monetary policy in the benchmark New Keynesian (NK) framework relies heavily on the counterfactual Full-Information Rational-Expectations (FIRE) assumption, both at the partial equilibrium (PE) and general equilibrium (GE) dimensions. We relax the Full-Information assumption and build a Heterogeneous-Agents NK model under dispersed information. We find that the response of output is amplified, compared to the Representative-Agent (RANK) version whenever income inequality is procyclical, but the amplification magnitude is dampened by dispersed information. This difference is explained by the lessened role of GE effects in our framework. We conduct the standard full-fledged NK analysis: we find that the determinacy region is widened as a result of as if aggregate myopia and show that our framework beyond FIRE does not suffer from the forward guidance puzzle. Finally, we find that transitory "animal spirits" or belief shocks produce large and persistent effects in output and inflation.
Reconciling Empirics and Theory: The Behavioural Hybrid New Keynesian Model with Atahan Afsar (Stockholm School of Economics), Richard Jaimes (Pontificia Universidad Javeriana) and Edgar Silgado (Central Bank of Ireland).
Presented at IIES Stockholm, Stockholm School of Economics and Pontificia Universidad Javeriana.
WP Javeriana
Abstract: Structural estimates of the standard New Keynesian model are at odds with microeconomic estimates. To reconcile these findings, we develop and estimate a behavioral New Keynesian model augmented with backward-looking households and firms. We find (i) strong evidence for bounded rationality, with a cognitive discount factor estimate of 0.4 at quarterly frequency; and (ii) that the behavioral setting with backward-looking agents helps us in harmonizing the New Keynesian theory with empirical studies. We suggest that both cognitive discounting and anchoring are essential, first, to match empirical estimates for certain parameters of interest, and second, to obtain the hump-shaped and initially muted impulse-response functions that we observe in the data.
Inflation Persistence, Noisy Information and the Phillips Curve
[Appendix] [Online Appendix]
Presented at the EEA-ESEM 2021 Congress, CEBRA 2021 Annual Meeting, the 11th RCEA Money, Macro & Finance Conference, the 9th UECE Conference on Economic and Financial Adjustments
Abstract: Inflation persistence and volatility have fallen since the mid 80s. Using micro-data from US Professional Forecasters on inflation expectations, I show that the gradual increase in public disclosure of US Fed actions and predictions have significantly reduced the anchoring in firm inflation expectations, affecting inflation dynamics. I show that an extended version of the New Keynesian model which relaxes the Full Information Rational Expectations assumption generates the documented fall in persistence. I find that whereas in the benchmark model the disconnection between inflation and the real side of the economy can only be due to a fall in the slope of the Phillips curve, in the noisy information setting it is the result of a change in beliefs. Once the misspecification in the benchmark Phillips curve is corrected, there is no empirical evidence of a change on its slope.
Publications
Monetary Policy and Liquidity Constraints: Evidence from the Euro Area with Mattias Almgren (IIES Stockholm), John Kramer (IIES Stockholm) and Ricardo Lima (IIES Stockholm).
[Pre-publication Draft] [Replication Package]
Forthcoming at AEJ: Macroeconomics
Presented at: Stockholm University, IIES Stockholm, Warwick University, Queen Mary University of London, Stanford, Yale, MIT, Harvard, and Università Bocconi.
Media Coverage: Nada es Gratis (in spanish).
Abstract: We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity constrained households. We do so in the context of the euro area using a Local Projections Instrumental Variables estimation. We construct an instrument for changes in interest rates from changes in overnight indexed swap rates in a narrow time window around ECB announcements. Monetary policy shocks have heterogeneous effects on output across countries. Using micro data, we show that the elasticity of output to monetary policy is larger in countries that have a larger fraction of households that are liquidity constrained.
Working Papers
HANK beyond FIRE
Presented at IIES Stockholm, Oxford NuCamp Virtual Workshop, Nordic Junior Macro Virtual Series, UCL Enter Seminar, and Norges Bank Macro Modelling Workshop.
Abstract: The transmission channel of monetary policy in the benchmark New Keynesian (NK) framework relies heavily on the counterfactual Full-Information Rational-Expectations (FIRE) assumption, both at the partial equilibrium (PE) and general equilibrium (GE) dimensions. We relax the Full-Information assumption and build a Heterogeneous-Agents NK model under dispersed information. We find that the response of output is amplified, compared to the Representative-Agent (RANK) version whenever income inequality is procyclical, but the amplification magnitude is dampened by dispersed information. This difference is explained by the lessened role of GE effects in our framework. We conduct the standard full-fledged NK analysis: we find that the determinacy region is widened as a result of as if aggregate myopia and show that our framework beyond FIRE does not suffer from the forward guidance puzzle. Finally, we find that transitory "animal spirits" or belief shocks produce large and persistent effects in output and inflation.
Reconciling Empirics and Theory: The Behavioural Hybrid New Keynesian Model with Atahan Afsar (Stockholm School of Economics), Richard Jaimes (Pontificia Universidad Javeriana) and Edgar Silgado (Central Bank of Ireland).
Presented at IIES Stockholm, Stockholm School of Economics and Pontificia Universidad Javeriana.
WP Javeriana
Abstract: Structural estimates of the standard New Keynesian model are at odds with microeconomic estimates. To reconcile these findings, we develop and estimate a behavioral New Keynesian model augmented with backward-looking households and firms. We find (i) strong evidence for bounded rationality, with a cognitive discount factor estimate of 0.4 at quarterly frequency; and (ii) that the behavioral setting with backward-looking agents helps us in harmonizing the New Keynesian theory with empirical studies. We suggest that both cognitive discounting and anchoring are essential, first, to match empirical estimates for certain parameters of interest, and second, to obtain the hump-shaped and initially muted impulse-response functions that we observe in the data.
