Research

WORKING PAPERS

Fiscal Requirements for Price Stability when Households Are Not Ricardian

with Anna Rogantini Picco

Are restrictions on fiscal policy necessary for monetary policy to be able to deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt absent inflation. We show that when households are not Ricardian, fiscal requirements still exist but take the very different form of a limit on the debt-to-GDP ratio. The debt-to-GDP limit captures the idea that public debt cannot be so large that the wealth effect of public debt on aggregate spending can no longer be counter-balanced by interest rate hikes, however large. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt, not just to the inflation it creates.

Keeping Control over Boundedly Rational Expectations

with Magali Marx

How can central banks avoid losing control over inflation expectations? We reconsider the issue away from rational expectations, for a class of boundedly rational expectations embedding cognitive discounting and long-term learning. We show that the monetary policies that deliver a unique bounded equilibrium are characterized as those that sufficiently increase a weighted average of present and future policy rates. Implementation through a Taylor or other feedback rule is unnecessary. Central to this result is the property that what active monetary policy prevents is not self-fulfilling inflation as under rational expectations, but inflation spirals as in models with purely backward-looking expectations.

Putting the I Back in the IS Curve

The canonical dynamic IS curve is derived assuming the interest rate channel originates in savings decisions alone. The paper derives it when the interest rate channel takes also root in investment decisions, shedding light on what changes investment makes. (1) In partial equilibrium, future rates matter less for investment than they do for consumption. (2) In general equilibrium, interest rates' effects are amplified by both the Keynesian cross and a new Investment cross. Their interaction can make future rates matter more than current ones. (3) Adding household heterogeneity, consumption can respond to interest rates even absent intertemporal substitution in consumption.

A Plucking Model of Business Cycles

with Emi Nakamura And Jón Steinsson

Code to date peaks and troughs

Replication Package

Note on Non-Linearities in the DMP Model

Press: Bloomberg, Agefi, La Planche à Billets

Accepted, Journal of Monetary Economics

In standard models, economic activity fluctuates symmetrically around a ``natural rate'' and stabilization policies can dampen these fluctuations but do not affect the average level of activity. An alternative view---labeled the ``plucking model'' by Milton Friedman---is that economic fluctuations are drops below the economy's full potential ceiling. We show that the dynamics of the unemployment rate in the US display a striking asymmetry that strongly favors the plucking model: increases in unemployment are followed by decreases of similar amplitude, while the amplitude of a decrease does not predict the amplitude of the following increase. In addition, business cycles last seven years on average and unemployment rises much faster during recessions than it falls during expansions. We augment a standard labor search model with downward nominal wage rigidity and show how it can fit the plucking property.

PUBLICATIONS