Monetary Economics Program Meeting, Fall 2021

Jia and Wu study the implications of the Fed's new policy framework of average inflation targeting (AIT) and its ambiguous communication. The central bank has the incentive to deviate from its announced AIT, which improves the trade-off between inflation and real activity, and implement inflation targeting ex post to maximize social welfare. Jia and Wu show two motives for ambiguous communication about the horizon over which the central bank averages inflation as a result of time inconsistency. First, it is optimal for the central bank to announce different horizons depending on the state of the economy. Second, ambiguous communication helps the central bank gain credibility.

In a broad class of sticky price models the non-neutrality of nominal shocks is encoded by a simple sufficient statistic: the ratio of the kurtosis of the size-distribution of price changes over the frequency of price changes. Alvarez, Ferrara, Gautier, Le Bihan, and Lippi test this theoretical prediction using data for a large number of firms representative of the French economy. They use the micro data to measure the cross sectional moments, including kurtosis and frequency, for about 120 PPI industries and 220 CPI categories. Alvarez, Ferrara, Gautier, Le Bihan, and Lippi use a Factor Augmented VAR to measure the sectoral responses to a monetary shock, as summarized by the cumulative impulse response of sectoral prices (CIRP), under three alternative identification schemes. The estimated CIRP correlates with the kurtosis and the frequency consistently with the prediction of the theory (i.e. they enter the relationship as a ratio). The analysis also shows that other moments not suggested by the theory, such as the mean, standard deviation and skewness of the size-distribution of price changes, are not correlated with the CIRP. Several robustness checks are discussed.

Coglianese, Olsson, and Patterson analyze a quasi-experiment of monetary policy and the labor market in Sweden during 2010-2011, where the central bank raised the interest rate substantially while the economy was still recovering from the Great Recession. The researchers argue that this tightening was a large, credible, and unexpected deviation from the central bank's historical policy rule. Using this shock and administrative unemployment and earnings records, Coglianese, Olsson, and Patterson quantify the overall effect on the labor market, examine which workers and firms are most affected, and explore what these patterns imply for how monetary policy affects the labor market. The researchers show that this shock increased unemployment broadly, but the increase in unemployment varied somewhat across different types of workers, with low-tenure workers in particular being highly affected, and less across different types of firms. Moreover, Coglianese, Olsson, and Patterson find that the structure of the labor market amplified the effects of monetary policy, as workers in sectors with more rigid wage contracts saw larger increases in unemployment. These patterns support models in which monetary policy leads to general equilibrium changes in employment, mediated through the institutions of the labor market.

Wolf and McKay show that, in a general family of linearized structural macroeconomic models, knowledge of the dynamic causal effects of contemporaneous and news shocks to the prevailing policy rule is sufficient to: a) construct counterfactuals under alternative policy rules; and b) recover the optimal policy rule corresponding to a given loss function. Under their assumptions, the derived counterfactuals and optimal policies are robust to the Lucas critique. Wolf and McKay then discuss strategies for applying these insights when only a limited amount of causal evidence on policy shock transmission is available.

In this paper, Makarov and Schoar provide detailed analyses of the Bitcoin network and its main participants. They build a novel database using a large number of public and proprietary sources to link Bitcoin addresses to real entities and develop an extensive suite of algorithms to extract information about the behavior of the main market participants. The researchers conduct three major pieces of analysis of the Bitcoin eco-system. First, Makarov and Schoar analyze the transaction volume and network structure of the main participants on the blockchain. Second, they document the concentration and regional composition of the miners which are the backbone of the verification protocol and ensure the integrity of the blockchain ledger. Finally, Makarov and Schoar analyze the ownership concentration of the largest holders of Bitcoin.

Using administrative firm-bank-loan level data from the U.S., Caglio, Darst, and Kalemli-Özcan document new facts about the credit market. First, private firms mostly borrow from banks and bank debt comprises the entire balance sheet debt of private SMEs, compared to large publicly listed firms who can switch between bond markets and drawing from their credit lines. Second, both private firms and SMEs borrow shorter maturity and pay higher interest rates relative to large listed firms. Third, SMEs mostly use their enterprise's continuation value as collateral rather than fixed assets and real estate. Fourth, the relation between collateral and risk--where risk is measured by the loan spread--is positive for large listed firms but negative for private firms and SMEs. Based on these facts, Caglio, Darst, and Kalemli-Özcan show that monetary policy transmission and risk-taking differ across SMEs and large listed firms. When monetary policy is expansionary, credit demand of SMEs with high leverage increases more. SMEs' borrowing capacity expands more given their frequent use of earnings and operations-based collateral. Caglio, Darst, and Kalemli-Özcan find no evidence of risk-taking by banks as they lend less to firms who defaulted before and likely to default in the future. Their results from the sample of all U.S. firms are driven by U.S. private firms and SMEs, implying the aggregate effects of monetary policy depend on both the size distribution of firms and the type of collateral used. Since SMEs cover 99 percent of all firms and over 50 percent of U.S. employment and output, their results have important implications for aggregate boom-bust cycles.