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Journal Article
Wage Growth When Inflation Is High
In a tight labor market, workers are able to respond to price increases by bargaining for higher wages. Analyzing conditions since the pandemic shows that, in the recent environment of elevated inflation and low unemployment, wages have become much more sensitive to expected price inflation than in the past. The impact of inflation expectations on wages also appears to have become longer lasting.
Working Paper
Shocks and Adjustments
We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two ...
Working Paper
Foreign stock holdings: the role of information
The household finance literature documents a large fraction of the population not participating in stock markets. It is also puzzling that a much greater share of households do not participate in foreign stock markets. Recent empirical evidence points towards the role of information in determining agents' portfolio choices. I test these results into a model that incorporates information on agents' portfolio allocation decision. In the model, consumers can invest in both domestic and foreign stocks and to update their information set, agents have to pay a cost implying that consumers update ...
Journal Article
Interpreting deviations from Okun’s Law
The traditional relationship between unemployment and output growth known as Okun?s law appeared to break down during the Great Recession. This raised the question of whether this rule of thumb was still meaningful as a forecasting tool. However, recent revisions to GDP data show that its relation with unemployment followed a fairly typical cyclical pattern compared with past deep recessions and slow recoveries. The comparatively common patterns suggest that rumors of the death of Okun?s law during the Great Recession were greatly exaggerated.
Journal Article
Finding normal: natural rates and policy prescriptions
Over the past several years, the Federal Open Market Committee?s longer-run forecasts of the short-term interest rate and unemployment rate have steadily declined. These forecasts reflect the Committee?s views about the levels of the policy interest rate and unemployment rate that will eventually prevail when the economy returns to normal. A simple monetary policy rule illustrates how the reductions in these forecasts can imply a lower projected path for the policy rate.
Working Paper
Financial Conditions and Capital Investment Choices
We show, both theoretically and empirically, that tight financial conditions shift investment toward cheaper but less energy-efficient capital. In a small open-economy model with vintage capital, higher financing costs reduce the present value of future energy savings, tilting firms’ choices along a cost efficiency frontier. Using 150 years of macroeconomic and energy data from 17 advanced economies, we find that tighter financial conditions reduce output, capital, and total energy consumption, but raise the amount of energy per unit of capital (energy intensity), a composition effect that ...
Working Paper
Fiscal Policy Design and Inflation: The COVID-19 Pandemic Experience
Fiscal support measures in response to the COVID-19 pandemic varied in their targeted beneficiaries. Relying on variability across 10 large economies, we study differences in the inflationary effects of fiscal support measures targeting consumers or businesses. Because conventional measures of real activity were distorted, we control for the underlying state of real economy using households sentiment data. We find that fiscal support measures to consumers, but not firms, had inflationary effects that manifested 5 weeks following the announcement and peaked at 12 weeks. The magnitude of the ...
Journal Article
The Greek crisis: Argentina revisited?
Greece?s enormous fiscal deficit and high debt level culminated earlier this year in the euro zone?s first sovereign debt crisis. High yields on Greece?s debt indicate that markets have priced in the possibility of default. Compared with Argentina, which defaulted on its debt in 2001, Greece?s fiscal position is much worse. However, unlike Argentina, Greece is supported by other euro zone countries and is not vulnerable to speculative currency attacks, advantages that offer it some protection from default.
Working Paper
Labor Markets in the Global Financial Crisis: The Good, the Bad and the Ugly
This note examines labor market performance across countries through the lens of Okun?s Law. We find that after the 1970s but prior to the global financial crisis of the 2000s, the Okun?s Law relationship between output and unemployment became more homogenous across countries. These changes presumably reflected institutional and technological changes. But, at least in the short term, the global financial crisis undid much of this convergence, in part because the affected countries adopted different labor market policies in response to the global demand shock.
Journal Article
Monetary policy when one size does not fit all
The European Central Bank recently raised its target interest rate for the first time since the 2008 financial crisis. When compared with a simple interest rate rule, this rate hike appears consistent with the euro area's nascent economic recovery and rising inflation. However, economic conditions vary greatly among the countries in the euro area and the ECB's new target rate may not be suitable for all of them.