| Louder than Rates: The Systematic Nature of Central Bank Communication with T. Assenza, D. Guney and P. Wangner.
Do central banks decide systematically how much to communicate when explaining their policy decisions? Using all U.S. Federal Open Market Committee policy statements since 1994, we measure communication effort through the change in Shannon entropy and estimate a forward-looking communication rule. We find that communication is systematic: the Federal Reserve communicates more when inflation is expected to exceed target and output is expected to fall below potential. This finding is robust across a variety of sensitivity exercises. We then develop a New Keynesian model with imperfect information showing that systematic communication acts as a second policy instrument, stabilizing expectations and complementing interest-rate policy, especially at the zero lower bound.
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| The Power of Persistence: How Demand Shocks and Monetary Policy Shape Macroeconomic Outcomes with P.Fève and P. Wangner.
Does a more persistent demand shock always generate a larger output response? Conventional wisdom says yes: forward-looking agents front-load spending in anticipation of higher lifetime resources, and the more lasting the shock, the stronger the expansion. This paper shows that this logic fails in New Keynesian models with an active monetary policy. The interplay between persistence and monetary policy stance governs a fundamental trade-off between two opposing forces: a permanent income channel that amplifies output, and a real interest rate channel that dampens it. Their balance generates three monetary policy regimes. In the empirically relevant intermediate regime, the output multiplier is hump-shaped in persistence.
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| From Buzz to Bust: How Fake News Shapes the Business Cycle with T. Assenza, P. Fève and S. Huber.
The proliferation of fake news poses significant challenges for policymakers and raises concerns about its potential impact on economic stability. This paper explores this question, focusing on the macroeconomic effects of technology related fake news in the US for the period 2007-2022. Utilizing a novel dataset of fact-checked statements from PolitiFact, we construct a binary indicator to build a proxy for the exogenous variation in fake news issuance. Adopting a proxy-VAR approach, we show that technology fake news increases macroeconomic uncertainty, exacerbates unemployment, and depresses industrial production. Similar effects are observed for fake news related to the supply side, such as tax rates or the price of gas. On the contrary, fake news related to government finance, market regulation, or the labor market does not impact economic stability. Furthermore, fake news that conveys negative information about technological developments exhibits stronger depressive impacts than positive ones.
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| Dynamic Identification in VARs, with P. Beaudry, P. Fève, A. Guay, F. Portier.
Most macroeconomic models, view economic outcomes as being generated by a combination of endogenous and exogenous dynamic forces. In particular, the exogenous forces are generally modeled as a set of independent dynamics processes. In this paper we begin by showing that this dual dynamic structure is sufficient to identify the entire set of structural impulse responses inherent to any such model. No extra restrictions are needed. We then use this result to suggest how it can be used to evaluate common SVAR restrictions (impact restrictions, long run restrictions and proxy-VAR).
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| The Hammer and the Dance: Equilibrium and Optimal Policy during a Pandemic Crisis, with TSE Macro Group.
We develop a comprehensive framework for analyzing optimal economic policy during a pandemic crisis in a dynamic economic model that trades off pandemic-induced mortality costs against the adverse economic impact of policy interventions. We use the comparison between the planner problem and the dynamic decentralized equilibrium to highlight the margins of policy intervention and describe optimal policy actions. As our main conclusion, we provide a strong and novel economic justification for the current approach to dealing with the pandemic, which is different from the existing health policy rationales. This justification is based on a simple economic concept, the shadow price of infection risks, which succinctly captures the static and dynamic trade-offs and externalities between economic prosperity and mortality risk as the pandemic unfolds.
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| Home Bias in Goods and Assets, with H. Dellas, B. Diba and A. Stockman.
We show that international trade in goods offers a compelling resolution of the portfolio home bias puzzle. A simple model with traded and non-traded goods implies that investors can achieve full international risk diversification if their foreign equity position (as a % of GDP) matches their country's degree of openness (the imports to GDP share). Empirical evidence on the international equity holdings of financially mature economies strongly supports this implication.
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| The Reluctant Defaulter: A Tale of High Government Debt with M. Habib and J.C. Rochet
We seek to account for the very high levels of public debt recently reached in many OECD countries. We do so by assuming that governments do their utmost to stave off default, which occurs only when a government fails to muster the funds needed for debt service. This distinguishes our work from existing work on sovereign debt, which has assumed that governments weigh the costs of debt service against those of default. The debt ratios we compute are quite close to prevailing levels: our baseline case has debt-to-GDP ratio slightly above 80%.
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| Macroeconomics of Bank Capital and Liquidity Regulations, with F. Boissay
We study the transmission mechanisms of liquidity and capital regulations as well as their effects on the economy and welfare. We propose a macro–economic model, in which a regulator faces the following trade–off. On the one hand, banking regulations reduce the aggregate supply of credit. On the other hand, they promote the allocation of credit to its best uses. Accordingly, in a regulated economy there is less, but more productive lending. Liquidity and capital requirements mutually reinforce each other, except when liquid assets are scarce. Both regulations are needed. The optimal requirements are relatively high. Our analysis provides general support for Basel III’s “multiple metrics” framework. |
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