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Discussion Paper
Good News, Leverage, and Sudden Stops
One of the major debates in open economy macroeconomics is the extent to which capital inflows are beneficial for growth. In principle, these flows allow countries to increase their consumption and investment spending beyond their income by enabling them to tap into foreign saving. Periods of such borrowing, however, are associated with large trade deficits, external debt accumulation, and, in some cases, overheating when these economies operate beyond their potential output level for an extended period of time. The relevant question in this context is whether the rate at which a country is ...
Working Paper
Patent-Based News Shocks
We exploit firm-level data on patent grants and subsequent reactions of stocks to identify technological news shocks. Changes in stock market valuations due to announcements of individual patent grants represent expected future increases in the technology level, which we refer to as patent-based news shocks. Our patentbased news shocks resemble diffusion news, in that they do not affect total factor productivity in the short run but induce a strong permanent effect after five years. These shocks produce positive comovement between consumption, output, investment, and hours. Unlike the ...
Working Paper
News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact
We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper ...
Working Paper
Monetary policy expectations and economic fluctuations at the zero lower bound
We propose a recursive VAR model augmented with survey-based measures of future interest rates to identify the effects of forward guidance on the U.S. economy. Our results show that when interest rates are away from the zero lower bound (ZLB), an exogenous shift in the perception toward higher future interest rates leads to an increase in current economic activity. However, when policy rates fall to the ZLB, economic activity decreases following an upward revision to expected future interest rates. These findings are robust to alternative estimation frameworks, identification schemes and data ...
Working Paper
News-driven uncertainty fluctuations
We embed a news shock, a noisy indicator of the future state, in a two-state Markov-switching growth model. Our framework, combined with parameter learning, features rich history-dependent uncertainty dynamics. We show that bad news that arrives during a prolonged economic boom can trigger a ?Minsky moment??a sudden collapse in asset values. The effect is greatly amplified when agents have a preference for early resolution of uncertainty. We leverage survey recession probability forecasts to solve a sequential learning problem and estimate the full posterior distribution of model primitives. ...
Working Paper
News and Uncertainty Shocks
We provide novel evidence that technological news and uncertainty shocks, identified one at a time using VAR models as in the literature, are correlated; that is, they are not truly structural. We then proceed by proposing an identification scheme to disentangle the effects of news and financial uncertainty shocks. We find that by removing uncertainty effects from news shocks, the positive responses of economic activity to news shocks are strengthened in the short term; and that the negative responses of activity to financial uncertainty shocks are deepened in the medium term as ?good ...
Report
Good news is bad news: leverage cycles and sudden stops
We show that a model with imperfectly forecastable changes in future productivity and an occasionally binding collateral constraint can match a set of stylized facts about ?sudden stop? events. ?Good? news about future productivity raises leverage during times of expansion, increasing the probability that the constraint binds, and a sudden stop occurs, in future periods. The economy exhibits a boom period in the run-up to the sudden stop, with output, consumption, and investment all above trend, consistent with the data. During the sudden stop, the nonlinear effects of the constraint induce ...
Working Paper
Is There News in Inventories?
This paper identifies total factor productivity (TFP) news shocks using standard VAR methodology and documents a new stylized fact: in response to news about future increases in TFP, inventories rise and comove positively with other major macroeconomic aggregates. The authors show that the standard theoretical model used to capture the effects of news shocks cannot replicate this fact when extended to include inventories. To explain the empirical inventory behavior, they develop a framework that relies on the presence of knowledge capital accumulated through a learning-by-doing process. The ...
Working Paper
What Drives Inventory Accumulation? News on Rates of Return and Marginal Costs
We study the effects of news shocks on inventory accumulation in a structural VAR framework. We establish that inventories react strongly and positively to news about future increases in total factor productivity. Theory suggests that the transmission channel of news shocks to inventories works through movements in marginal costs, through movements in sales, or through interest rates. We provide evidence that changes in external and internal rates of return are central to the transmission for such news shocks. We do not find evidence of a strong substitution effect that shifts production from ...
Working Paper
Forward guidance and the state of the economy
This paper examines forward guidance using a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule. The effectiveness of forward guidance depends on the state of the economy, the speed of the recovery, the ZLB constraint, the degree of uncertainty, the monetary response to inflation, the size of the news shocks, and the forward guidance horizon. Specifically, the stimulus from forward guidance falls as the economy deteriorates or as households expect a slower recovery. When ...