Search Results
Journal Article
Effects of Asset Valuations on U.S. Wealth Distribution
Net household wealth is highly unequal across U.S. households, and the types of assets people hold tend to change according to their position along the distribution of wealth. The pattern of household portfolios shows that the top 1% of households hold most of their wealth in stocks, while home values are most important for the wealth of the bottom half of the distribution. Higher growth in equity values relative to real estate values therefore tends to widen the wealth distribution, as experienced during the coronavirus pandemic.
Journal Article
Financial Markets, Oil Prices, and Supply-Side Risks
The relation between stocks and bonds indicates whether supply or demand shocks dominate the risks to economic activity. After two decades of concerns primarily about changes in demand, the stock-bond correlation recently flipped, suggesting that the perceived source of risk to the economy has shifted towards supply shocks. Other financial correlations, such as the stock-oil correlation, also changed accordingly and thus agree with this interpretation. In line with this evidence, financial market pricing now indicates that elevated oil prices and potential inflation are prominent sources of ...
Working Paper
A Currency Premium Puzzle
Standard asset pricing models reconcile high equity premia with smooth risk-free rates by inducing an inverse functional relationship between the mean and the variance of the stochastic discount factor. This highly successful resolution to closed-economy asset pricing puzzles is fundamentally problematic when applied to open economies: It requires that differences in currency returns arise almost exclusively from predictable appreciations, not from interest rate differentials. In the data, by contrast, exchange rates are largely unpredictable, and currency returns arise from persistent ...
Working Paper
The Social Cost of Near-Rational Investment
We show that the stock market may fail to aggregate information even if it appears to be efficient, and that the resulting decrease in the information content of prices may drastically reduce welfare. We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors when forming expectations about future productivity. As information aggregates in the market, these errors amplify and crowd out the information content of stock prices. When prices reflect less information, the conditional variance of stock returns rises, causing an ...
Journal Article
Recession Prediction on the Clock
The jobless unemployment rate is a reliable predictor of recessions, almost always showing a turning point shortly before recessions but not at other times. Its success in predicting recessions is on par with the better-known slope of the yield curve but at a shorter horizon. Hence, it performs better for predicting recessions in the near term. Currently, this data and related series analyzed using the same method are not signaling that a recession is imminent, although that may change in coming months.
Discussion Paper
Evaluating Forecast Performance of Market-based Measures of Inflation Expectations in Europe
Predictions of future inflation rates shed light on the path of the economy and inform central banks’ policy rate decisions. Two commonly used sources of inflation forecasts are surveys and market-based inflation expectations. Survey-based inflation expectations, such as those from the Survey of Professional Forecasters, are derived by eliciting responses from a group of respondents about their beliefs.
Working Paper
The Optimal Supply of Central Bank Reserves under Uncertainty
This paper provides an analytically tractable theoretical framework to study the optimal supply of central bank reserves when the demand for reserves is uncertain and nonlinear. We fully characterize the optimal supply of central bank reserves and associated market equilibrium. We find that the optimal supply of reserves under uncertainty is greater than that absent uncertainty. With a sufficient degree of uncertainty, it is optimal to supply a level of reserves that is abundant (on the flat portion of the demand curve) absent shocks. The optimal mean spread between the market interest rate ...
Working Paper
A Risk-based Theory of Exchange Rate Stabilization
We develop a novel, risk-based theory of the effects of exchange rate stabilization. In our model, the choice of exchange rate regime allows policymakers to make their currency, and by extension, the firms in their country, a safer investment for international investors. Policies that induce a country's currency to appreciate when the marginal utility of international investors is high lower the required rate of return on the country's currency and increase the world-market value of domestic firms. Applying this logic to exchange rate stabilizations, we find a small economy stabilizing its ...
Journal Article
China's Exchange Rate Policies and U.S. Financial Markets
Exchange rate stabilization or currency ?pegs? are among the most prevalent interventions in international financial markets. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors. When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U.S. dollar to a basket of currencies suggests that China?s interest rates increase while U.S. interest rates decrease.
Journal Article
Average-Inflation Targeting and the Effective Lower Bound
In response to the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to essentially zero. It took further measures to support the functioning of financial markets and the flow of credit. Nevertheless, the economic downturn is putting downward pressure on inflation, which had already been running below the Fed’s 2% target for several years. This raises additional concerns that inflation expectations could decline and push inflation down further, ultimately hampering economic activity. A monetary policy framework based on average-inflation targeting could help address these ...