Monetary Policy and Monetary Policy and Liquidity Constraints: Evidence from the Euro Area with Mattias Almgren (IIES Stockholm), John Kramer (IIES Stockholm) and Ricardo Lima (IIES Stockholm).
Presented at: Stockholm University, IIES Stockholm, Warwick University, Queen Mary University of London, Stanford, Yale, MIT, Harvard, and Università Bocconi.
R&R at AEJ: Macroeconomics
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.
HANK beyond FIRE. Coming soon.
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 beyond FIRE. We find that the response of output is amplified, compared to the Representative-Agent (RANK) and Two-Agents (TANK) versions, whenever income inequality is procyclical, consistent with recent research. However, we show that the amplification magnitude is dampened by dispersed information. This difference is explained by the marginal role of GE effects in our framework beyond FIRE. We use our model to 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.
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.
Presented at: Stockholm University, IIES Stockholm, Warwick University, Queen Mary University of London, Stanford, Yale, MIT, Harvard, and Università Bocconi.
R&R at AEJ: Macroeconomics
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.
HANK beyond FIRE. Coming soon.
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 beyond FIRE. We find that the response of output is amplified, compared to the Representative-Agent (RANK) and Two-Agents (TANK) versions, whenever income inequality is procyclical, consistent with recent research. However, we show that the amplification magnitude is dampened by dispersed information. This difference is explained by the marginal role of GE effects in our framework beyond FIRE. We use our model to 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.
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.
