Research
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Published and Accepted Papers
with Francesco D'Acunto, Ulrike Malmendier and Juan Ospina
Journal of Political Economy, accepted for publication
Abstract: We show that, when forming expectations about aggregate inflation, consumers rely on the prices of goods in their personal grocery bundles. Our analysis uses novel representative micro data that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. The data also reveal that the weights consumers assign to price changes depend on the frequency of purchase, rather than expenditure share, and that positive price changes loom larger than similar-sized negative price changes. Prices of goods offered in the same store but not purchased (any more) do not affect inflation expectations, nor do other dimensions such as the volatility of price changes. Our results provide empirical guidance for models of expectations formation with heterogeneous consumers.
2017 AEA, ECB Conference on 'Understanding inflation: lessons from the past, lessons for the future', Ifo Conference on Macro and Survey Data, 2019 SITE, Cleveland Fed Conference on Inflation
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with Alex Chinco and Andreas Neuhierl
Journal of Financial Economics, accepted for publication
Abstract: We propose a new statistical approach to estimate the ex-ante probability of discovering an anomaly (the baserate). Under certain conditions, a one-to-one mapping between the baserate and the best-fit tuning parameter in a penalized regression exists. Empirically, we find that the
anomaly baserate has fluctuated substantially since the start of our sample in May 1973. The baserate was much higher in 2003 than in 1990. As a proof of concept, we construct a trading strategy that invests in previously discovered predictors and show that adjusting this strategy to account for the prevailing anomaly baserate boosts its performance.
AQR Asset Management Symposium, MFA, The Future of Financial Information Conference
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with Roni Michaely and Stefano Rossi
Media Coverage: WSJ
Journal of Financial Economics (accepted for publication)
Abstract: Contrary to signaling models’ central predictions, changes in the level of cash flows do not empirically follow changes in dividends. We use the Campbell (1991) decomposition to construct cash-flow and discount-rate news from returns and find the following: (1) Both dividend changes and repurchase announcements signal changes in cash-flow volatility (in opposite direction); (2) larger cash-flow volatility changes come with larger announcement returns; and (3) neither discount-rate news, nor the level of cash-flow news, nor total stock return volatility change following dividend changes. We conclude cash-flow news–and not discount-rate news–drive payout policy, and payout policy conveys information about future cash-flow volatility.
2019 AFA, 2017 NBER Corporate Finance, Adam Smith Corporate Finance Conference, the Corporate Finance Conference at Washington University, the Review of Corporate Finance Studies Conference, the 2017 TAU Finance Conference, 2018 Western Finance Association Annual Meeting
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with Andreas Neuhierl
Media Coverage: Systemic Risk and Systemic Value
Journal of Monetary Economics (2019), 108: 140-155.
Abstract:The slope factor is constructed from changes in federal funds futures of different horizons and predicts stock returns at the weekly frequency: faster policy easing positively predicts returns. It contains information about the speed of future monetary policy tightening and loosening, and predicts changes in interest rates and forecast revisions of professional forecasters. The tone of speeches by FOMC members correlates with the slope factor. The predictive power concentrates in times of high uncertainty in line with the pre-FOMC announcement drift. Our findings show the path of interest rates matters for asset prices, and monetary policy affects asset prices continuously.
AEA 2017, FIRS 2017 Conference, SFS Finance Cavalcade 2017, 2019 Annual Research Conference Bank of Ukraine, 2016 European Finance Association Annual Meeting, 2016 Ifo Conference on Macroeconomics and Survey Data, 2017 HEC-McGill Winter Finance Workshop, 2016 European Economic Association Annual Meeting, 2016 Wabash River Conference, 2017 The European Winter Finance Summit, AFA 2018
Other versions: SSRN, CES-ifo, NBER, BFI, JME
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with Ernesto Pasten and Raphael Schoenle
Journal of Monetary Economics (accepted for publication)
Abstract: We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Quantitatively, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects. Heterogeneity in input-output linkages and consumption shares contribute only marginally to real effects but alter substantially the identity and contribution of the most important sectors to the transmission of monetary shocks. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.
AEA 2017, Inflation: Drivers and Dynamics Conference 2016, Annual Inflation Targeting Seminar of the Banco Central do Brasil 2016, 2016 Konstanz Conference on Monetary Theory and Policy, Banque de France Conference on Price Setting and Inflation, EEA 2015, SED 2015
Other versions: JME
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with Joachim Freyberger and Andreas Neuhierl
Review of Financial Studies (accepted for publication)
Abstract: We propose a nonparametric method to study which characteristics provide incremental information for the cross-section of expected returns. We use the adaptive group LASSO to select characteristics and to estimate how they affect expected returns nonparametrically. Our method can handle a large number of characteristics, allows for a flexible functional form, and our implementation is insensitive to outliers. Many of the previously identified return predictors don’t provide incremental information for expected returns, and nonlinearities are important. We study the properties of our method in simulations and find large improvements both in model selection and prediction compared to alternative selection methods.
Booth--EDHEC--RFS Conference on New Methods for the Cross Section, 2017 NBER SI Forecasting and Empirical Methods, 2017 Texas Finance Festival, 2017 Revelstoke Finance Conference, 2016 Santiago Finance Workshop, SFS Finance Cavalcade 2017, FRA Conference 2016, TAU Finance Conference 2016, 2017 Luxembourg Asset Management Summit, 2017 Finance UC Conference, AFA 2018
Other versions: NBER, BFI, CES-ifo, SSRN
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with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita
American Economic Review Papers & Proceedings (2019), 102: 562-566.
Abstract: Cognitive abilities help explain the large cross-sectional variation in inflation expectations at the household level. But which type of cognitive abilities are important? We find that not only quantitative abilities but also logical and verbal abilities are important to explain the accuracy and plausibility of households' inflation expectations. We discuss the channels through which different forms of cognition might shape households' ability to forecast future macroeconomic variables. We also draw implications for the effectiveness of policies that aim to manage households' expectations.
2019 AEA
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with Francesco D'Acunto and Marcel Prokopczuk
Media Coverage:The Economist, The American Interest, Haaretz, The Marker, Tablet Magazine, La Stampa, Die Welt, Oekonomenstimme, ZU Daily, Journalist's Resource
Review of Economic Studies (2018), 86(3): 1170–1206.
Abstract: For centuries, Jews in Europe have specialization in financial services. At the same time they have been the victims of historical antisemitism on the part of the Christian majority. We find that present-day financial development is lower in German counties where historical antisemitism was higher, compared to otherwise similar counties. Households in counties with high historical antisemitism have similar savings rates but invest less in stocks, hold lower bank deposits, and are less likely to get a mortgage (but not to own a house) after controlling for wealth and a rich set of current and historical covariates. Present-day antisemitism and supply-side forces do not appear to fully explain the results. Present-day households in counties where historical antisemitism was higher express lower trust in finance, but have levels of generalized trust similar to other households.
2016 Barcelona Summer Forum: Towards Sustained Economic Growth, NBER Behavioral Finance Meeting 2014, NBER SI Political Economy 2015, EFA 2015, Miami Behavioral Finance Conference, UBC Summer Finance Conference, SunTrust Finance Conference 2014, European Winter Finance Conference 2015, The European Winter Finance Summit 2015, SED 2015, Midwest Finance Conference 2015.
Other versions: NBER, BEHL, SSRN
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with Francesco D'Acunto and Daniel Hoang
American Economic Review Papers & Proceedings (2018), 108(5): 519-523.
Abstract: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We provide preliminary evidence for the effectiveness of such policies using changes in value-added tax (VAT) and household survey data for Poland. We find households increased their inflation expectations and willingness to purchase durables before the increase in VAT. Future research has to ensure income, wealth effects, or intratemporal substitution channels cannot explain these results and ideally exploit exogenous variation in VAT in a fixed nominal interest rate environment.
2018 AEA
Other versions: NBER, KIT, SSRN, AER
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with Francesco D'Acunto, Ryan Liu, and Carolin Pflueger
Media Coverage: Chicago Booth Review
Journal of Financial Economics (2018), 129(1): 46-68.
Abstract: The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most flexible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of bank deregulation across states and over time, which we use in a difference-in-differences strategy. Firms' frequency of price adjustment did not change around the deregulation.
NBER CF 2016, NBER SI Capital Markets and the Economy 2016, 2016 Edinburgh Corporate Finance Conference, 2016 ASU Sonoran Winter Finance Conference, 2016 WFA, Stockholm Corporate Finance Symposium 2016, FIRS 2016 Conference, 2016 Risk Management Conference Mont Tremblant, 2016 Calgary, HEC, McGill Winter Conference, EFA 2015
Other versions: SSRN, CES-ifo, BFI, NBER, JFE
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Finalist of the 2013 Dr. Richard A. Crowell Memorial Prize
Colloquium on Financial Markets Best Paper Award
Media Coverage: alpha architect
Journal of Financial Economics (2018), 128(3): 486-503.
Abstract: The term structure of equity returns is downward-sloping: stocks with high cash
flow duration earn
1.10% per month lower returns than short-duration stocks in the cross section. I create a measure of
cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can
explain only 50% of the return differential, and the difference in returns is three times larger after periods
of high investor sentiment. Analysts extrapolate from past earnings growth into the future and predict
high returns for high-duration stocks following high-sentiment periods, contrary to ex-post realizations.
I use institutional ownership as a proxy for short-sale constraints, and find the negative cross-sectional
relationship between cash flow duration and returns is only contained within short-sale constrained stocks.
AFA 2016, 2016 Colloquium on Financial Markets, 2016 Econometric Society European meeting, NBER AP 2015, Colorado Finance Summit 2015, 2015 China International Conference in Finance, 2015 HEC-McGill Winter Finance Workshop, SGF 2013
Other versions: NBER, SSRN, CES-ifo, BFI, JFE
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with Yuriy Gorodnichenko
Media Coverage: AEA Research Highlight, Econbrowser, The Economist, Economist's View, WCEG, DeLong
American Economic Review (2016), 106(1): 165-199.
Abstract: We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness.
NBER EFG 2013, NBER SI EFG-PD 2013, ESNASM 2013, Barcelona Summer Forum 2013, BU/ Boston Fed Conference 2013, German Economists Abroad Conference 2013.
Other versions: NBER, SSRN, AER
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with Martin Lettau and Matteo Maggiori
Winner of the 2013 AQR Insight Award
Media Coverage: AQR Announcement, WSJ, Reuters
Journal of Financial Economics (2014), 114(2): 197-225.
Abstract:The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.
AEA 2012, EFA 2012, EEA 2012, ESNAWM 2013, AQR 2013, NBER AP 2013, Finance Cavalcade 2013, Imperical College FX Conference 2013, 2016 Quantitative Trading Symposium.
Other versions: NBER, CEPR, SSRN, JFE
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with Marcel Prokopczuk
SEW Eurodrive Award for Best Undergraduate Thesis in Business Economics
Journal of Futures Markets (2011), 31(10): 971-994.
Abstract: This article analyzes the issue of American option valuation when the underlying exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation-based methods being considered in previous sudies. The EBT-based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach.
FMA EM 2010
Other versions: SSRN
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non-refereed publications
with Francesco D'Acunto and Daniel Hoang
ifo DICE Report (2017), 15(1): 9-11.
Abstract:The Euro area faces zero inflation paired with low economic growth, at a time when the effective lower bound on nominal interest rates and large budget deficits are constraining conventional monetary and fiscal policy. In this article, we discuss the theoretical and empirical evidence on unconventional measures of fiscal policy that increase inflation, spur economic growth, and keep the tax burden on households constant without inducing budget deficits.
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Working Papers
with Nittai Bergman and David Matsa
Abstract: This paper analyzes the heterogeneous effects of monetary policy on workers with different levels of labor force attachment. Exploiting variation in labor market tightness across metropolitan areas, we show that the employment of populations with lower labor force attachment–Blacks, high school dropouts, and women–is more responsive to expansionary monetary policy in tighter labor markets. We develop a New Keynesian model with heterogeneous workers that explains these results. The model shows that expansionary monetary shocks lead to larger and more persistent increases in the employment of low attachment populations when the central bank follows an average inflation targeting rule and when the Phillips curve is flatter. These findings suggest that the Federal Reserve’s recent move from a strict to an average inflation targeting framework will especially benefit workers with lower labor force attachment.
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with Francesco D'Acunto, and Shuyao Yang
Abstract: Using a unique German panel that allows measuring manpower constraints at the firm level, we document that manpower constraints vary substantially over time and across industries. Manpower-constrained firms have 5% higher capacity utilization and 21% longer order backlog. They also plan on higher investments in physical and human capital. For identification, we exploit the fall of the Berlin Wall and the subsequent differential fluxes of specialized Eastern workers across Western German states as a shock to manpower constraints. We also design a Manpower Constraint (MPC) Index using the loadings on firm-level financials that are available in commonly used dataset worldwide.
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with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita
Media Coverage: Fazit - das Wirtschaftsblog, Handelsblatt
conditionally accepted, Review of Economic Studies
Abstract: We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of inflation expectations, and the consumption plans of a representative male population. High-IQ men display 50% lower forecast errors for inflation than other men. High-IQ men, but not others, have consistent inflation expectations and perceptions over time. In terms of choice, only high-IQ men increase their consumption propensity when expecting higher inflation as the consumer Euler equation prescribes. Education levels, income, income expectations, socio-economic status, and occupations, although important, do not explain the variation of expectations and choice by IQ. Our results have implications for heterogeneous-agents models of household consumption, saving, and investment.
2019 AEA, CES-ifo Summer Institute: Expectation Formation, CES-ifo Workshop on Subjective Expectations and Probabilities in Economics, CEBRA Annual Meeting, CEPR Household Finance Conference, Cowles Macro Conference, Symposium on Economics and Institutions, the European Central Bank, the EABCN Asset Pricing and Macro Conference, European Midwest Micro/Macro Conference.
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with Francesco D’Acunto and Ulrike Malmendier
conditionally accepted, Proceedings of the National Academy of Sciences
Abstract: Expectations about macro-finance variables, such as inflation, vary significantly across genders, even within the same household. We conjecture that traditional gender roles expose women and men to different economic signals in their daily lives, which in turn produce systematic variation in expectations. Using unique data on the contributions of men and women to household grocery chores, their resulting exposure to price signals, and their inflation expectations, we show that the gender expectations gap is tightly linked to participation in grocery shopping. We also document a gender gap in other economic expectations and discuss how it might affect economic choices.
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with Olivier Coibion and Yuriy Gorodnichenko
revise and resubmit, Journal of Political Economy
Abstract: We study how different forms of communication influence inflation expectations in a randomized controlled trial using nearly 20,000 U.S. individuals. We solicit individuals’ inflation expectations in the Nielsen Homescan panel then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. Our results have implications for how central banks should communicate to the broader public.
Other versions: NBER
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Winner of the Top Finance Graduate Award
UBS Best Conference Paper Prize at the EFA Annual Meeting 2014
2014 EFA Best Doctoral Student Conference Paper Prize
Best Finance PhD Award in Honor of Prof. Greenbaum (Finalist)
Cubist Systematic Strategies PhD Candidate Award for Outstanding Research
Best PhD Student Paper Award, FMA European Conference 2014
revise and resubmit, Journal of Political Economy
Abstract: This paper examines the asset pricing implications of nominal rigidities. Firms that adjust their product prices infrequently earn a return premium of more than 4% per year. Merging unique product-price data at the firm level with stock returns, I document that the premium for sticky-price firms is a robust feature of the data and varies substantially over the business cycle. The premium is not driven by other firm and industry characteristics. Differential exposure to systematic risk fully explains the premium for sticky-price firms.
WFA 2014, NBER SI Impulse and Propagation Mechanisms 2014, NBER SI EFG-PD 2014, SED 2014, EFA 2014, EEA 2014, Duke Conference on Macroeconomics and Finance 2014, CEPR European Summer Symposium in Financial Markets, 5th Ifo Conference on Macroeconomics and Survey Data, Mannheim Macro Conference 2014, Jerusalem Finance Conference 2014, 6th Joint French Macro Workshop, Warwick Frontiers of Finance 2014, FMA Europe 2014, Safe Asset Pricing Workshop 2014, German Economists Abroad Conference 2014, Paris December 2014 Finance Meeting, Annual Meeting of the German Finance Association.
Other versions: SSRN
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with Francesco D'Acunto and Daniel Hoang
Media Coverage: Bloomberg Surveillance, Die Welt, VoxEU, Econbrowser
revise and resubmit, Review of Financial Studies
Abstract: With a binding effective lower bound on interest rates and large government deficits, conventional policies are unviable and policymakers resort to unconventional policies, which target households’ expectations directly. Using unique micro data and a difference-in-differences strategy, we assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to stimulate consumption via raising households’ inflation expectations. All households’ inflation expectations and spending plans react to unconventional fiscal policy. Instead, households, contrary to experts, do not react to forward guidance. We argue that policies aiming to affect households directly are ineffective if (non-expert) households do not understand them.
CES-ifo Venice Summer Institute, AEA, New York Fed Workshop on Subjective Expectations, 9th Conference of the International Research Forum on Monetary Policy, NBER ME, 5th Macro Finance Workshop, Reserve Bank of Australia’s Quantitative Macroeconomics Workshop, Conference on The Price-Stability-Target in the Eurozone and the European Debt Crisis, Household Economics and Decision-Making Conference Cleveland Fed, 6th Ifo Conference on Macroeconomics and Survey Data, Midwest Macro Meeting, SED, EEA, Bundesbank PHF Workshop, Econometric Society World Congress, Chicago Junior Macro and Finance meetings, 8th Joint French Macro Workshop
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with Harjoat S. Bhamra, Christian Dorion and Alexandre Jeanneret
revise and resubmit, Review of Financial Studies
Abstract: We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically founded nominal rigidities: fixed nominal debt coupons (sticky leverage) and sticky cash flows. Taken together, these two frictions result in higher real equity prices and credit spreads when expected inflation falls. An increase in expected inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts that the negative impact of expected inflation on real equity values is stronger for low leverage firms. We find empirical support for the model’s predictions.
2019 AFA, 2017 Adam Smith Asset Pricing, 2017 HEC-McGill Winter Finance Workshop, 2017 BoC-FRBSF-SFU Conference, 2017 SAFE Asset Pricing Workshop, 2017 Conference on Corporate Policies and Asset Prices, 2017 Society for Economic Dynamics, 2018 Cavalcade, 2018 WFA, 2018 EFA, 2018 NFA
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with Francesco D'Acunto and Alberto Rossi
Media Coverage: WSJ
revise and resubmit, Review of Financial Studies
Abstract: Consumers might overestimate optimal spending if forming beliefs based on others’ spending, because others’ conspicuous consumption is more visible than the rest of their consumption. If true, information about others’ overall spending should change beliefs and choice. For a test, we provide crowdsourced information about anonymous “peer groups” to users of a FinTech app. Users converge to peers, especially when peer groups are more informative. For identification, we compare similar users matched to different peers based on sharp thresholds. A randomized control trial on a non-selected population supports external validity. Our results inform the design of robo-advisors for spending.
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with Olivier Coibion and Yuriy Gorodnichenko
Abstract: Using a large-scale survey of U.S. consumers, we study how the large one-time transfers to individuals from the CARES Act affected their consumption, saving and labor- supply decisions. Most respondents report that they primarily saved or paid down debts with their transfers, with only about 15 percent reporting that they mostly spent it. When providing a detailed breakdown of how they used their checks, individuals report having spent or planning to spend only around 40 percent of the total transfer on average. This relatively low rate of spending out of a one-time transfer is higher for those facing liquidity constraints, who are out of the labor force, who live in larger households, who are less educated and those who received smaller amounts. We find no meaningful effect on labor- supply decisions from these transfer payments, except for twenty percent of the unemployed who report that the stimulus payment made them search harder for a job.
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with Francesco D'Acunto, Daniel Hoang, and Maritta Paloviita
Abstract: Communication targeting households and firms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, whom central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will bene t households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public's trust in central banks, which is crucial to ensure the e effectiveness of their policies.
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with Olivier Coibion and Yuriy Gorodnichenko
Abstract: We use a large-scale representative survey of households from October 19-21 that elicits respondents’ expectations about the presidential election’s outcome as well as their economic expectations to document several new facts. First, people disagree strongly about the likely outcome of the election, despite widespread publicly available polling information. Most Democrats are very confident in a Biden win while most Republicans are very confident in a Trump win. Second, respondents predict a fairly rosy economic scenario if their preferred candidate wins but a dire one if the other candidate wins. Since most respondents are confident in their favored outcome, unconditional forecasts are similar across parties despite the fact that underlying probability distributions and conditional forecasts are very different. Third, when presented with recent polling data, most voters change their views by little unless they are independent and/or have relatively weak priors about the outcome. Information that emphasizes the uncertainty in polling data has larger effects in terms of reducing polarization in expected probabilities over different electoral outcomes. Fourth, exogenous information that changes individuals’ probability distribution over electoral outcomes also changes their unconditional forecasts in a corresponding manner. These changes in economic expectations in turn are likely to affect household economic decisions.
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with Olivier Coibion and Yuriy Gorodnichenko
Abstract: Using a large-scale survey of U.S. households during the Covid-19 pandemic, we study how new information about fiscal and monetary policy responses to the crisis affects households’ expectations. We provide random subsets of participants in the Nielsen Homescan panel with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures, as well as recommendations from health officials. This experiment allows us to assess to what extent these policy announcements alter the beliefs and spending plans of households. In short, they do not, contrary to the powerful effects they have in standard macroeconomic models.
Published as Covid Papers (2020) 29: 1-49.
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with Olivier Coibion and Yuriy Gorodnichenko
Abstract: We use a repeated large-scale survey of households in the Nielsen Homescan panel to characterize how labor markets are being affected by the covid-19 pandemic. We document several facts. First, job loss has been significantly larger than implied by new unemployment claims: we estimate 20 million lost jobs by April 8th, far more than jobs lost over the entire Great Recession. Second, many of those losing jobs are not actively looking to find new ones. As a result, we estimate the rise in the unemployment rate over the corresponding period to be surprisingly small, only about 2 percentage points. Third, participation in the labor force has declined by 7 percentage points, an unparalleled fall that dwarfs the three percentage point cumulative decline that occurred from 2008 to 2016. Early retirement almost fully explains the drop in labor force participation both for those survey participants previously employed and those previously looking for work. We find increases in the fraction of those being retired across the whole age distribution with women and blacks driving a large part of the accelerated retirement.
Published as Covid Papers (2020), 21: 40-58.
Other versions: IZA
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with Olivier Coibon and Yuriy Gorodnichenko
Abstract: We study how the differential timing of local lockdowns due to COVID-19 causally affects households’ spending and macroeconomic expectations at the local level using several waves of a customized survey with more than 10,000 respondents. About 50% of survey participants report income and wealth losses due to the corona virus, with the average losses being $5,293 and $33,482 respectively. Aggregate consumer spending dropped by 31 log percentage points with the largest drops in travel and clothing. We find that households living in counties that went into lockdown earlier expect the unemployment rate over the next twelve months to be 13 percentage points higher and continue to expect higher unemployment at horizons of three to five years. They also expect lower future inflation, report higher uncertainty, expect lower mortgage rates for up to 10 years, and have moved out of foreign stocks into liquid forms of savings. The imposition of lockdowns can account for much of the decline in employment in recent months as well as declines in consumer spending. While lockdowns have pronounced effects on local economic conditions and households’ expectations, they have little impact on approval ratings of Congress, the Fed, or the Treasury but lead to declines in the approval of the President.
Published as Covid Papers (2020), 20, 1-51.
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with Ali Ozdagli
Abstract: We study the importance of production networks for the transmission of macroeconomic shocks using the stock market reaction to monetary policy shocks as a laboratory. We decompose the overall effect of monetary policy shocks into a direct effect and a network effect and attribute 55 to 85 percent of the overall effect to the network effect. Large network effects are a robust feature of the data, and we document similar patterns in realized cash-flow fundamentals. A simple model with intermediate inputs predicts that the reaction of stock returns to shocks follows a spatial autoregression, which we exploit for our empirical strategy. Our results suggest that production networks are an important mechanism for transmitting aggregate shocks to the real economy.
AEA 2017, NBER ME 2016, NBER SI Impulse and Propagation Mechanisms, 2016 LSE Economic Networks and Finance Conference, Firms in Macroeconomics Conference 2016, SED 2016, 2016 Barcelona Summer Forum: Asset Prices, Finance and Macroeconomics, CEPR Asset Prices and the Macroeconomy Conference, 2016 European Finance Association Annual Meeting, 2016 Texas Finance Festival, 2016 Duke-UNC Asset Pricing Conference, 2016 Adam Smith Asset Pricing Workshop, 2016 Istanbul Conference on Advances in Empirical Macro & Finance, International Conference on Sovereign Bond Markets, Ghent Workshop on Empirical Macroeconomics, 2016 Econometric Society North American Summer Meeting, 2016 European Economic Association Annual Meeting, 2016 University of Washington Summer Finance Conference
Other versions: SSRN, NBER, CES-ifo, BFI
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with Ernesto Pasten and Raphael Schoenle
Abstract: We study the potency of sectoral productivity shocks to drive aggregate fluctuations in the presence of three empirically relevant heterogeneities across sectors: sector size, intermediate input consumption, and pricing frictions in a multi-sector New Keynesian model. We derive conditions under which sectoral shocks matter for aggregate volatility and show the distribution of sector size or input-output linkages are neither necessary nor sufficient to generate aggregate fluctuations. Quantitatively, we calibrate our full model to 341 sectors using US data and find (1) heterogeneous price rigidity across sectors doubles the aggregate volatility from sectoral shocks relative to a calibration with homogeneous price rigidity; 2) realistically calibrated sectoral productivity shocks are key to generating sizable aggregate fluctuations of both GDP and prices; 3) heterogeneity of price rigidity matters for aggregate fluctuations because it changes the effective distribution of sector size and network centrality; 4) plausibly sized aggregate technology shocks cannot generate sizeable volatility in the presence of price rigidity; and 5) sectoral shocks generate large aggregate fluctuations under different empirically plausible monetary policy rules.
Other versions: ECB
NBER ME 2017, SED 2016, LSE Workshop on Networks in Macro and Finance 2017, AEA 2018
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with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita
Media Coverage: Fazit - das Wirtschaftsblog
Abstract: We document that a large fraction of a representative population of men—those below the top of the distribution by cognitive abilities (IQ)—barely reacts to measures of monetary and fiscal policy that aim at influencing their leverage and durable spending decisions. To the contrary, high-IQ men respond to these measures in line with policy makers' assumptions. Heterogeneity in observables such as income, education levels, economic expectations, or financial constraints do not drive these patterns. Our unique microdata include administrative information on cognitive abilities, economic expectations, consumption and borrowing plans, as well as actual debt levels and interest paid by debtholders in Finland. Limited cognitive abilities might represent human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household borrowing and spending decisions.
CES-ifo Summer Institute: Expectation Formation, CES-ifo Workshop on Subjective Expectations and Probabilities in Economics, CEBRA Annual Meeting, CEPR Household Finance Conference, Cowles Macro Conference, Symposium on Economics and Institutions, the European Central Bank, the EABCN Asset Pricing and Macro Conference, European Midwest Micro/Macro Conference.
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with Andreas Neuhierl
Media Coverage: alpha architect, The NBER Digest, CBR, Forbes, Manager Magazin
Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. The drift is more pronounced during periods of high uncertainty, it is a market-wide phenomenon, and it is present in all industries and many international equity markets. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4. The cumulative returns before FOMC meetings significantly predict the subsequent policy surprise.
2017 Colorado Finance Summit, 2017 German Economists Abroad Conference, 2018 MFA
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with Francesco D'Acunto and Jin Xie
China Financial Research Conference (CFRC) Best Paper Award 2018
Media Coverage: China Business Knowledge
Abstract: Direct experience of a peer's punishment might make non-punished peers reassess the probability and consequences of facing punishment and hence induce a change in their behavior. We test this mechanism in a setting, China, in which we observe the reactions to the same peer's punishment by listed firms with different incentives to react -- state-owned enterprises (SOEs) and non-SOEs. After observing peers punished for wrongdoing in loan guarantees to related parties, SOEs -- which are less disciplined by traditional governance mechanisms than non-SOEs -- cut their loan guarantees. SOEs whose CEOs have stronger career concerns react more than other SOEs to the same punishment events, a result that systematic differences between SOEs and non-SOEs cannot drive. SOEs react more to events with higher press coverage even if information about all events is publicly available. After peers' punishments, SOEs also increase their board independence, reduce inefficient investment, increase total factor productivity, and experience positive cumulative abnormal returns. The bank debt and investment of related parties that benefited from tunneling drop after listed peers' punishments. Strategic punishments could be a cost-effective governance mechanism when other forms of governance are ineffective.
2019 AFA, 2018 China Financial Research Conference, 2018 CICF, the LBS Accounting Symposium, the Sun Yat-Sen University Finance International Conference
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with Francesco D'Acunto, Thomas Rauter, and Christoph Scheuch
Abstract: In a representative sample of new borrowers, access to digital lines of credit increases the spending of consumers with ex-ante higher savings rates (liquid consumers) permanently. After access to the line of credit, these consumers reduce their existing savings rate but do not tap into negative deposits and hence do not raise debt. Through our FinTech bank setting, we can elicit consumers’ risk preferences, beliefs, perceptions, and other characteristics directly. Common theoretical determinants of precautionary savings motives do not differ systematically across liquid and illiquid consumers but liquid consumers have higher subjective beliefs about the need for precautionary savings nonetheless.
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with Olivier Coibion, Dimitris Georgarakos, and Yuriy Gorodnichenko
Abstract: We compare the causal effects of forward guidance communication about future interest rates on households’ expectations of inflation, mortgage rates, and unemployment to the effects of communication about future inflation in a randomized controlled trial using more than 25,000 U.S. individuals in the Nielsen Homescan panel. We elicit individuals’ expectations and then provide 22 different forms of information regarding past, current and/or future inflation and interest rates. Information treatments about current and next year’s interest rates have a strong effect on household expectations but treatments beyond one year do not have any additional impact on forecasts. Exogenous variation in inflation expectations transmits into other expectations. The richness of our survey allows us to better understand how individuals form expectations about macroeconomic variables jointly and the non-response to long-run forward guidance is consistent with models in which agents have constrained capacity to collect and process information.
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with Lydia Cox, Gernot J. Müller, Ernesto Pasten, and Raphael Schoenle
Abstract: “Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the U.S. federal government and establish five facts. First, government spending is granular; that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, contracts and firms are short-lived in the dataset and sectoral spending is only moderately persistent. Fourth, idiosyncratic variation dominates fluctuations in spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure occurs, markups can be both pro-cyclical or counter-cyclical depending on the source of the shock, and the multiplier tends to be larger compared to a one-sector benchmark, aligning the model with the empirical evidence.
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with Dominik Boddin and Francesco D'Acunto
Abstract: Following the experience of the 2008-2009 financial crisis, governments around the world extended large-scale liquidity and credit programs at the onset of the COVID-19 crisis with the aim of hindering waves of defaults and mass layoffs (aka, bazooka lending). But does focusing on firms' credit constraints make sense in crises that do not originate from a shock to the financial-sector? In a new large-scale survey of beliefs and plans of German firms during the COVID-19 crisis combined with administrative data, firms identify pessimistic and uncertain beliefs about future demand, rather than current or future credit constraints, as the main impediment for their business. Demand-driven uncertainty is also what limits firms' demand for credit. Firms predominantly rely on retained earnings to finance their operations. Those who access external financing do so largely through regular commercial loans rather than loans guaranteed by government programs. Firms that apply for government-guaranteed loans are more likely to display zombie features.
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with Chris Florackis, Christodoulos Louca, and Roni Michaely
Abstract: We develop a novel firm-level measure of cybersecurity risk using textual analysis of cybersecurity-risk disclosures in corporate filings. The measure successfully identifies firms extensively discussing cybersecurity risk in their 10-K, displays intuitive relations with quantitative measures of cybersecurity risk disclosure language, exhibits a positive trend over time, is more prevalent among industries relying more on information technology systems, correlates with several characteristics linked to firms hit by cyber attacks and, importantly, predicts future cyber attacks. Stocks with high exposure to cybersecurity risk exhibit high expected returns on average, but they perform poorly in periods of increasing attention to cybersecurity risk.
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