Age Structure and the Impact of Monetary Policy, with John Leahy (Forthcoming, American Economic Journal: Macroeconomics)

We study whether the effects of monetary policy are dependent on the demographic structure of the population. We exploit cross-sectional variation in states response to an identified monetary policy shock. We find that there are three distinct age groups. In response to an increase in interest rates, the responses of private employment and personal income are weaker the greater the share of population under 35 years of age, are stronger the greater the share between 40 and 65 years of age, and are relatively unaffected by the share older than 65 years. We find that all age groups become more responsive to monetary policy shocks when the proportion of middle aged increases. It is not so much being middle aged that matters as being surrounded by middle aged people.

The Economic Effects of Government Spending: Using Expectations Data to Control for Information, with Matthew Hall (Forthcoming, Macroeconomics Dynamics)

Empirical estimates of the effects of fiscal policy tend to be relatively imprecisely estimated, largely due to inadequately controlling for the information set of agents. In this paper, we develop a methodology for using professional forecast to estimate the effects of government spending shocks on the variables of interest. We use one-quarter ahead professional forecasts to obtain the unanticipated changes in government spending. In addition, we use longer horizon forecasts to estimate the impulse response functions allows us to very efficiently control for the information set of agents, which has challenged researchers in the past. As a result, our estimated impulse response functions are much more precisely estimated than those obtained by other empirical studies in the literature. We focus on forecasts from the Federal Reserve Board's Greenbook forecasts. We find that the government spending multiplier is close to one on impact and increases to 1.7 after about two years. Consumption and wages both increase, while inflation falls.

Using Private Forecasts to Estimate the Effects of Monetary Policy, Journal of Monetary Economics (55), 806-824

I develop a methodology that uses the forecasts of market participants and of policy makers to estimate the effects of monetary policy on output and inflation. My approach has advantages over the standard practice of fitting a vector autoregression to the data. I apply my methodology to data on output, interest rates and prices. I find that, even using the Federal Reserve Board’s Greenbook forecasts to control for the policy maker’s information set, prices rise initially in response to a monetary contraction. This finding undermines the standard justification for including an index of commodity prices in VARs.

Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections, with Gabriel Ehrlich

We use close elections in parliamentary democracies as natural experiments to estimate public debt levels’ effects on real interest rates. We first estimate that an election in which no party achieves a parliamentary majority causes the debt-to-GDP ratio to increase by 21 percentage points over the following five years relative to an election in which one party barely secures a majority. We next estimate that real interest rates rise by a relative 119 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.6 basis point increase in real rates. That effect is larger than most previous estimates in the literature, suggesting the potential importance of simultaneity in the determination of real rates and government debt levels.

The Ineffectiveness of Fiscal Policy in Recessions: Size Does Matter

We analyze whether there are asymmetries in the response of aggregate variables to government spending shocks. We use professional forecasts to estimate the shocks to government spending, as well as to estimate the state-dependent impulse response functions. We have three key results. (1) Government spending shocks have larger effects in expansions than in recessions, partly driven by the fact that business fixed investment tends to fall in recessions but increase in expansions. This result is especially strong in the period excluding the Great Recession. (2) Small shocks have stronger effects on GDP, consumption, and investment and therefore imply larger multipliers while large shocks have small effects and imply multipliers that are less than one. This result could help explain the difference in multipliers estimated by VAR-style analyses versus those estimated by narrative-based defense spending news shocks. To the extent that shocks based on defense spending news are large - that could explain why the defense news shocks lead to small multipliers while VAR analyses lead to large multipliers. (3) At the zero lower bound for interest rates, GDP had a stronger response relative to normal times in the period ending in 2011, but the result disappears once we include the 2012-15 sample period.

Stay or Exit? Welfare Effects of a Monetary Union

This paper studies the costs and benefits to forming monetary unions and develops a unique, simple “Exit Index” to help quantify which countries are more likely to leave a monetary union and which are likely to stay. In this paper, I focus on differences in productivity, size, and the degree of integration or openness between countries in a monetary union. Given the importance of the role of money in a monetary union, I use a two-country search model of money to characterize the equilibrium monetary policy under two regimes. In the first, each country has its own monetary authority that chooses its monetary policy to maximize the welfare of its citizens. In the second, a single monetary authority decides on a common monetary policy to maximize world welfare. The model predicts that countries that are large, open and more productive gain the most by the formation of a union. Based on these results, I construct an index to help quantify the gains from staying in a monetary union and help predict whether countries will want to leave. Using data from 2000-2016 for 21 European nations, I find that almost all countries behaved in accordance with what my Exit Index would predict. I find that Finland, Greece, and Portugal have the least to gain from staying in a monetary union and hence are flight risks from the Eurozone. France, Germany, Italy, and Luxembourg gain the most. Of the nations that joined the EU but not the Euro, Denmark and Sweden made rational choices, the UK however would have gained as much as Luxembourg did by joining the Euro. Norway, Iceland, and Switzerland chose not to join the EU. They are among the five countries that have the lowest to gain by joining a monetary union as per my index. They too made the rational choice.


The Entrepreneurship Channel of Monetary Policy, joint with John Leahy and Emilio Colombi

(National Science Foundation grant SES 1919362, co-PI with John Leahy)

Demographic Characteristics of the Population and Monetary Policy, joint with John Leahy

(National Science Foundation grant SES 1919362, co-PI with John Leahy)