Lumpy Investment, Business Cycles, and Stimulus Policy

By Thomas Winberry

American Economic Review, January 2021

I study the aggregate implications of micro-level lumpy investment in a model consistent with the empirical dynamics of the real interest rate. The elasticity of aggregate investment with respect to shocks is procyclical because more firms are likely to m...

Sectoral Price Facts in a Sticky-Price Model

By Carlos Carvalho, Jae Won Lee, and Woong Yong Park

American Economic Journal: Macroeconomics, January 2021

We develop a multisector sticky-price DSGE model that can endogenously deliver differential responses of prices to aggregate and sectoral shocks. Input-output production linkages and a (standard) monetary policy rule contribute to a slow response of price...

Oil, Equities, and the Zero Lower Bound

By Deepa D. Datta, Benjamin K. Johannsen, Hannah Kwon, and Robert J. Vigfusson

American Economic Journal: Macroeconomics, April 2021

From late 2008 to 2014, oil and equity returns were more positively correlated than in other periods. In addition, we show that both oil and equity returns became more responsive to macroeconomic news. We provide empirical evidence that these changes resu...

Interest Rate Liberalization and Capital Misallocations

By Zheng Liu, Pengfei Wang, and Zhiwei Xu

American Economic Journal: Macroeconomics, April 2021

We study the consequences of interest rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China's distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand productio...

Feedbacks: Financial Markets and Economic Activity

By Markus Brunnermeier, Darius Palia, Karthik A. Sastry, and Christopher A. Sims

American Economic Review, June 2021

Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly frequency variables, identified by heteroskedasticity. Negative reduced-f...

Leaning against the Wind and Crisis Risk

By Moritz Schularick, Lucas ter Steege, and Felix Ward

American Economic Review: Insights, June 2021

Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced e...

Policy Watch: Challenges for Terrorism Risk Insurance in the United States

By Howard Kunreuther and Erwann Michel-Kerjan

Journal of Economic Perspectives, Fall 2004

This paper examines the role that insurance has played in dealing with terrorism before and after September 11, 2001, by focusing on the distinctive challenges associated with terrorism as a catastrophic risk. The Terrorism Risk Insurance Act of 2002 (TRI...

Capital Markets in China and Britain, 1770–1860: Evidence from Grain Prices

By Wolfgang Keller, Carol H. Shiue, and Xin Wang

American Economic Journal: Applied Economics, July 2021

Based on comprehensive grain price data, we employ a storage model to estimate consistent interest rates and compare capital market development between Britain and China. Interest rates for Britain were lower than China's on average by about 3 percentage ...

Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies

By Julio A. Carrillo, Enrique G. Mendoza, Victoria Nuguer, and Jessica Roldán-Peña

American Economic Journal: Macroeconomics, July 2021

Violations of Tinbergen's rule and strategic interaction undermine stabilization policies in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly moni...

The Transmission of Monetary Policy Shocks

By Silvia Miranda-Agrippino and Giovanni Ricco

American Economic Journal: Macroeconomics, July 2021

Commonly used instruments for the identification of monetary policy disturbances are likely to combine the true policy shock with information about the state of the economy due to the information disclosed through the policy action. We show that this sign...

What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices

By Thomas M. Mertens and John C. Williams

American Economic Review, August 2021

This paper analyzes the effects of the lower bound for interest rates on the distributions of inflation and interest rates. In a New Keynesian model with a lower bound, two equilibria emerge: policy is mostly unconstrained in the "target equilibrium," whe...

Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

By David Berger, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra

American Economic Review, September 2021

How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not...

Why Are Banks Exposed to Monetary Policy?

By Sebastian Di Tella and Pablo Kurlat

American Economic Journal: Macroeconomics, October 2021

We propose a model of banks' exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk ave...

Long-Term Finance and Investment with Frictional Asset Markets

By Julian Kozlowski

American Economic Journal: Macroeconomics, October 2021

Trading frictions in financial markets affect more long-term than short-term bonds, generating an upward-sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter ...

Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?

By W. Scott Frame and Lawrence J. White

Journal of Economic Perspectives, Spring 2005

The roles of Fannie Mae and Freddie Mac have become increasingly controversial in the modern world of residential mortgage finance. We describe the special features of these two companies and their roles in the mortgage markets. We then discuss the contro...

Some Uses of Happiness Data in Economics

[Symposium: Happiness Economics]

By Rafael Di Tella and Robert MacCulloch

Journal of Economic Perspectives, Winter 2006

Happiness research is based on the idea that it is fruitful to study empirical measures of individual welfare. The most common is the answer to a simple well-being question such as "Are you Happy?" Hundreds of thousands of individuals have been asked this...

Forward Guidance and Durable Goods Demand

By Alisdair McKay and Johannes F. Wieland

American Economic Review: Insights, March 2022

We study the monetary transmission mechanism in a quantitative fixed-cost model of durable goods demand. We show that aggregate demand is substantially more sensitive to contemporaneous interest rates than to forward guidance about future interest rates. ...

Poverty in America: Trends and Explanations

[Symposium: Poverty]

By Hilary W. Hoynes, Marianne E. Page, and Ann Huff Stevens

Journal of Economic Perspectives, Winter 2006

Despite robust growth in real GDP per capita in the last three decades, U.S. poverty rates have changed very little. We summarize some basic facts about poverty in the United States, relying on a combination of previously published data from the Census Bu...

State-Dependent Effects of Monetary Policy: The Refinancing Channel

By Martin Eichenbaum, Sergio Rebelo, and Arlene Wong

American Economic Review, March 2022

This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from re...

Sectoral Heterogeneity and Monetary Policy

By Jonathan Kreamer

American Economic Journal: Macroeconomics, April 2022

Since sectors differ in their sensitivity to interest rates, monetary policy produces inefficient sectoral fluctuations. In a model with sectoral heterogeneity, I show that policymakers should weight sectors proportionally to their interest elasticities, ...