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A Monetary-Fiscal Theory of Sudden Inflations
This paper posits an information channel as the explanation for sudden inflations. Consumers saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumers' behavior and prices. This setting explains why there can be long stretches of time during which government surpluses ...
Discussion Paper
Information and Liquidity in the Market for Foreign Currency Denominated Sovereign Bonds
This note finds a negative, non-linear relationship between bond yield and liquidity using data on Portuguese, Irish, Italian, Greek, and Spanish (PIIGS) sovereign bonds from 2010-2015. This relationship is predicted by the asymmetric information model of bond liquidity by Holmstrom (2015) and Gorton (2017).
Discussion Paper
Predicting Future Recessions
This note introduces a general method to derive recession probabilities from forecasts using real-time data in parsimoniously specified logistic regressions. I apply two specifications of the general method that produces an implied recession probability to forecasts contained in releases of the Survey of Professional Forecasters (SPF). Using yearly forecasts from the 2018:Q3 SPF, the probability of a recession peaks between 30 percent in 2020 and 40 percent in 2021. Using quarterly forecasts, the probability of a recession within four quarters is monotonically increasing during the forecast, ...
Working Paper
Intermeeting Rate Cuts as a Response to Rare Disasters
This paper measures the probability of rare disasters by measuring the probability of the intermeeting federal funds rate cuts they provoke. Differentiating between months with Federal Open Market Committee (FOMC) meetings and months without identifies excess returns on federal funds futures averaging -1.5 bps per horizon month-ahead at short horizons, corresponding to a 3-5% per month risk-neutral probability of an intermeeting rate cut. The excess returns differ between months with and without meetings, suggesting a positive risk premium associated with meetings. The federal funds excess ...
Working Paper
A Monetary-Fiscal Theory of Sudden Inflations and Currency Crises
Treating nominal government bonds like other bonds leads to a new theory of sudden inflations and currency crises. Holmstrom (2015) and Gorton (2017) describe bonds as having costly-to-investigate opaque backing that consumers believe is sufficient for repayment. Government bonds' nominal return is their face value, their real return is determined by the government's surplus. In normal times, consumers are confident of repayment but ignorant of the true surpluses that will fund that repayment. When consumers' belief in real repayment wavers, they investigate surpluses. If consumers learn ...
Discussion Paper
There is No Single Best Predictor of Recessions
Which term spread, or term spread derived, measure is the most accurate predictor of recessions? The author conducts a robustness analysis of different spreads and shows that there is no single most accurate predictor at any horizon.
Discussion Paper
Unpredictable Recessions
This note shows forward term spreads provide little information about recessions more than a couple years ahead. In fact, forward term spreads are essentially equivalent to today's term spreads in their ability to accurately predict further-ahead recessions.