Job Market Paper
- Monetary Policy, Expectations and Business Cycles in the U.S. Post-War Period.
This paper examines the interactions between monetary policy and the formation of expectations to explain U.S. business cycle fluctuations in the post-war period. I estimate a conventional medium-scale New-Keynesian model, in which I relax the assumption that the central bank pursued an ‘active’ monetary policy — i.e. that stabilizes inflation and output growth — over this entire period. I find that between 1955 and 1979 monetary policy was ‘passive’, and structural shocks de-anchored inflation expectations from the central bank’s long-run target. Fundamental productivity and cost shocks were the primary cause of volatility and propagated via persistent self-fulfilling inflationary expectations. By contrast, non-fundamental ‘sunspot’ shocks, caused by unexpected changes in inflation expectations, were insignificant sources of uncertainty.
- Solving and Estimating Indeterminate DSGE Models, with Roger E. A. Farmer and Vadim Khramov, Journal of Economic Dynamics and Control, May 2015, Volume 54, pp. 17-36.
We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We prove that our method is equivalent to the solution method proposed by Lubik and Schorfheide (2003, 2004), and using the New-Keynesian model described in Lubik and Schorfheide (2004), we demonstrate how to apply our theoretical results with a practical exercise.
- Keynesian Economics Without the Phillips Curve, with Roger E. A. Farmer, Journal of Economic Dynamics and Control, forthcoming.
We extend Farmer’s (2012b) Monetary (FM) Model in three ways. First, we derive an analog of the Taylor Principle and we show that it fails in U.S. data. Second, we use the fact that the model displays dynamic indeterminacy to explain the real effects of nominal shocks. Third, we use the fact that the model displays steady-state indeterminacy to explain the persistence of unemployment. We show that the FM model outperforms the New-Keynesian model and we argue that its superior performance arises from the fact that the reduced form of the FM model is a VECM as opposed to a VAR.
- A Generalized Approach to Indeterminacy in Linear Rational Expectations Models, with Francesco Bianchi, R&R to Quantitative Economics.
We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original model with a set of auxiliary exogenous equations that are used to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region are unknown. Thus, the researcher can estimate the model by using standard packages without restricting the estimates to a certain area of the parameter space. We apply our method to simulated and actual data from a prototypical New-Keynesian model for both regions of the parameter space. We show that our method successfully recovers the true parameter values independent of the initial values.
Vox CEPR’s Policy Portal
- Vox video: Psychology and the economy, Bank of England, July 2017.