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COVID-19, Real Uncertainty, and Monetary Policy

Paper Session

Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: Central Bank Research Association & American Economic Association
  • Chair: Raphael Schoenle, Brandeis University and Federal Reserve Bank of Cleveland

Housing, the Credit Market and Unconventional Monetary Policies: From the Sovereign Crisis to the Great Lockdown

Hamed Ghiaie
,
ESCP Business School-Paris

Abstract

This paper develops a two-country model of a monetary union to evaluate the interaction between housing and unconventional monetary policies. The model is calibrated for the Euro Area and assesses the ECB’s Asset Purchase Programmes (APP) from 2015 until the Pandemic Emergency Purchase Programme (PEPP) in 2020. The model incorporates heterogeneous households, portfolio balance effects, a credit market susceptible to default, and nominal and real rigidities. In this paper the 2020 lockdown is studied as a negative signal from macroeconomic fundamentals which causes labor to grind to a halt. The model features the housing accelerator and the post-crisis house price double-dip. The findings illustrate the way in which macro-housing channels lead to self-reinforcing loops, affecting the portfolio re-balancing channel as the asset purchase’s main way to influence the economy. The results show that the asset purchasing performs better during a crisis, particularly if it is conducted for an appropriate extent of time. The findings illustrate that the PEPP should be extended until the covid-19 crisis phase is over and it alone is not sufficient to accelerate the recovery; more actions namely targeted fiscal policy is required. Finally, the APP, PEPP and lockdown are assessed through a welfare analysis.

Wall Street versus Main Street QE

Eric Sims
,
University of Notre Dame
Cynthia Wu
,
University of Notre Dame

Abstract

The Federal Reserve has reacted swiftly to the COVID-19 pandemic. It has resuscitated many of its programs from the last crisis by lending to the financial sector, which we refer to as “Wall Street QE.” The Fed is now proposing to also lend directly to, and purchase debt directly from, non-financial firms, which we label “Main Street QE.” Our paper develops a new framework to compare and contrast these different policies. In a situation in which financial intermediary balance sheets are impaired, such as the Great Recession, Main Street and Wall Street QE are perfect substitutes and both stimulate aggregate demand. In contrast, for situations like the one we are now facing due to COVID-19, where the production sector is facing significant cash flow shortages, Wall Street QE becomes almost completely ineffective, whereas Main Street QE can be highly stimulative.

Pricing under Distress

Ernesto Pasten
,
Central Bank of Chile and Toulouse School of Economics
Boragan Aruoba
,
University of Maryland
Andres Fernandez
,
Central Bank of Chile
Felipe Saffie
,
University of VIrginia

Abstract

Using a novel daily dataset from VAT invoices, this paper investigates the pricing behavior of supermarkets during the riots in Chile, unleashed from mid-October to mid-November 2019. The main results are: (1) price stickiness increased, (2) the average size increases for both positive and negative price changes, and (3) the fraction of small price changes decreases. In addition, we document that riots had no significant effect on supermarkets' suppliers prices, and the regional variation in the intensity of riots had no effects on supermarkets' pricing behavior. We discuss implications for modelling of nominal price rigidities from this quasi-natural experiment.

Can Pandemic-Induced Uncertainty Increase Automation and Income Inequality?

Sylvain Leduc
,
Federal Reserve Bank of San Francisco
Zheng Liu
,
Federal Reserve Bank of San Francisco

Abstract

The COVID-19 pandemic has raised concerns about the future of work. The pandemic may become recurrent, necessitating repeated adoptions of social distancing measures (voluntary or mandatory), creating substantial uncertainty about worker productivity. But robots are not susceptible to the virus. Thus, pandemic-induced job uncertainty may boost the incentive for automation. However, elevated uncertainty also reduces aggregate demand and reduces the value of new investment in automation. We assess the importance of automation in driving business cycle dynamics following an increase in job uncertainty in a quantitative New Keynesian DSGE framework. We find that, all else being equal, job uncertainty does stimulate automation, and increased automation helps mitigate the negative impact of uncertainty on aggregate demand.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy