Research

Working Papers

This paper studies the macroeconomic effect of the state dependency of central bank asset market operations and their interactions with household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We quantify the aggregate impact of an occasionally binding zero lower bound in determining an asymmetry between the effects of asset purchases and sales. When close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing minimizes the economic costs of monetary policy normalization. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not amplify the aggregate effects of asset market operations.

This paper compares the distributional effects of conventional monetary policy and forward guidance. Adopting a structural VAR model, we first estimate the impact of both policies on the macroeconomy and on consumption inequality in the United States. We find similar responses of aggregate real and financial variables. In contrast, consumption inequality is countercyclical after a monetary policy shock, but responds procyclically to forward guidance, due to the diverse reactions of households at the top and bottom of the consumption distribution. We build a New Keynesian model with household heterogeneity to rationalize these differences. Motivated by the empirical evidence, we highlight the government's response via a fiscal transfer scheme that reacts to changes in the debt burden and to cyclical variations. A fiscal adjustment differing in timing and magnitude leads to a relatively larger decline in consumption among financially constrained agents under conventional monetary policy, but a smaller decline under forward guidance. Our findings emphasize the importance of considering the negative second-order effects that different central bank tools might entail and the crucial role of fiscal adjustments in mitigating these effects.

Heterogeneity and information rigidities impact the effectiveness of monetary policy transmission to aggregate demand. I document considerable differences in the frequency of information updating across U.S. households.  Using a tractable two-agent New Keynesian model with heterogeneous households and sticky information, I then show that the response of aggregate consumption to a monetary policy shock is shaped by an asymmetric interaction of amplification and dampening. First, an attenuated consumption response might arise even if the income of constrained households responds disproportionately to the shock and income inequality is countercyclical, decreasing the probability of achieving amplification. Second, household heterogeneity is proportionately more influential in combination with sticky information, while the latter dampens aggregate consumption more in the absence of heterogeneity. The model is solved analytically by a simple, but novel approach which overcomes difficulties in handling the infinite state space caused by the information friction.

Work in Progress