Working Papers

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. 

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.

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.

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