Sticky Leverage: Comment, with Ander Perez-Orive and Bálint Szőke (submitted)
Abstract: We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.
More than Words: Twitter Chatter and Financial Market Sentiment, with Travis Adams, Diego Silva, and Francisco Vazquez-Grande (submitted)
Abstract: We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.
Getting in all the Cracks: Monetary Policy and Financial Vulnerabilities, and Macro Risk, with Tyler Pike (redrafting in progress)
Old Abstract: We estimate the effect of monetary policy on financial vulnerabilities and the implications for risks to the economic growth outlook. We extract a small number of factors from a large dataset of financial vulnerability indicators that contain predictive information on tail risk for economic growth . We find that vulnerabilities arising from asset valuation pressures (i.e., price of risk indicators) drive short-term risks to macroeconomic outlook, while indicators of vulnerabilities arising from non-financial and financial institution balance sheets vulnerabilities (i.e., quality of risk indicators) drive medium-run risks. We include price and quantity of risk factors in a proxy SVAR, and show that an unexpected tightening in the monetary policy stance increases vulnerabilities that are predictive of short-horizon tail risk, while reducing tail risk vulnerabilities in the medium term.
Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms, with Nina Boyarchenko, François Gourio, and Andrea Tambalotti, FEDS paper 5, February 2022
Monetary Policy Tradeoffs and the Federal Reserve’s Dual Mandate, with Isabel Cairó, Vasco Cúrdia, Thomas A. Lubik, and Albert Queralto, FEDS paper 66, August 2020
Core and Crust: Inflation Dynamics and the Term Structure of Interest Rates, with Luca Benzoni and Olena Chyruk, Review of Financial Studies, vol. 33, no.8, August 2020
Financial Stability and Optimal Interest-Rate Policy, with Thomas Laubach, David López-Salido and Taisuke Nakata, International Journal of Central Banking, vol. 57, March 2019
Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations, American Economic Review, vol. 106, no. 8, August 2016.
No-arbitrage restrictions and the U.S. Treasury Market, with Luca Benzoni and Olena Chyruk, Economic Perspectives, Vol.36, Second Quarter 2012, Federal Reserve Bank of Chicago.
A New Index to Measure U.S. Financial Conditions, with Michele Cavallo, Giovanni Favara, William Peterman, John Schindler, Nitish Sinha, FEDS Notes (2023)
Monetary Policy, Inflation Outlook, and Recession Probabilities, with Luca Benzoni, Makena Schwinn, Yannick Timmer, and Francisco Vazquez-Grande, FEDS Notes (2022)
The Asymmetric Costs of Misperceiving R-star, with Isabel Cairó, Vasco Cúrdia, and Albert Queralto, FRBSF Economic Letter (2021)
Term Premium, Credit Risk Premium, and Monetary Policy, with Hiroatsu Tanaka