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 deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt under stable prices. We show that when households are not Ricardian, fiscal requirements still exist but take a fundamentally different form: a limit on the debt-to-GDP ratio. Beyond that limit, no interest rate hike however large can counterbalance the wealth effect of public debt on aggregate spending. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt and 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? Under rational expectations, respecting the Taylor principle is needed to ward off self-fulfilling inflation. We reconsider the issue away from rational expectations, for a class of boundedly rational expectations embedding cognitive discounting and long-term learning. (1) Self-fulfilling inflation is no longer a concern, but too passive a monetary policy leads to inflation spirals. (2) Active monetary policies can be characterized without restricting to Taylor rules, as those that sufficiently increase a weighted average of present and future policy rates. (3) The more the central bank cares about output stabilization, the more it should deliver the necessary tightening through expectations of future hikes instead of current hikes.
Putting the I Back in the IS Curve
How do interest rates affect aggregate consumption? The recent literature on household heterogeneity has revived the importance of the Keynesian cross, which amplifies the initial reaction of consumption to interest rate changes through high MPCs. Yet this channel still originates in households' intertemporal substitution. This paper shows how, once it is combined with investment, household heterogeneity creates a new channel that works entirely away from intertemporal substitution. High MPCs are not enough. The channel relies on an interaction between heterogeneity in MPCs and heterogeneity in the share of labor income in household incomes.
A Plucking Model of Business Cycles
with Emi Nakamura And Jón Steinsson
Code to date peaks and troughs
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
Make-up Strategies with Finite Planning Horizons but Infinitely Forward-Looking Asset Prices, with Hervé Le Bihan and Julien Matheron
Journal of Monetary Economics, 2024
Journal of Money, Credit and Banking, 2023
A Pitfall of Cautiousness in Monetary Policy, with Sophie Guilloux-Nefussi and Adrian Penalver
International Journal of Central Banking, 2023
Press: The Economist