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Published and Accepted Papers

The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

with Ernesto Pasten and Raphael Schoenle

Journal of Monetary Economics (conditionally accepted)

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

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Dissecting Characteristics Nonparametrically

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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Cognitive Abilities and Inflation Expectations

with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita

American Economic Review Papers & Proceedings (2019)

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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Historical Antisemitism Ethnic Specialization and Financial Development

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, accepted for publication

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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Unconventional Fiscal Policy

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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Flexible Prices and Leverage

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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Cash Flow Duration and the Term Structure of Equity Returns

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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Are Sticky Prices Costly? Evidence from the Stock Market

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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Conditional Risk Premia in Currency Markets and Other Asset Classes

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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American Option Valuation: Implied Calibration of GARCH Pricing--Models

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

The Effect of Unconventional Fiscal Policy on Consumption Expenditure

with Francesco D'Acunto and Daniel Hoang

Media Coverage: Chicago Booth Review, WSJ

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

Nominal Rigidities and Asset Pricing

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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Monetary Policy Through Production Networks: Evidence from the Stock Market

with Ali Ozdagli

revise and resubmit, Econometrica

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 60 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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Estimating the Anomaly Baserate

with Alex Chinco and Andreas Neuhierl

revise and resubmit, Journal of Financial Economics

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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Signaling Safety

with Roni Michaely and Stefano Rossi

Media Coverage: WSJ

revise and resubmit, Journal of Financial Economics

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: (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, nor the level of cash-flow news, or 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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Monetary Policy Communication, Policy Slope and the Stock Market

with Andreas Neuhierl

Media Coverage: Systemic Risk and Systemic Value

revise and resubmit, Journal of Monetary Economics

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

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Exposure to Daily Price Changes and Inflation Expectations

with Francesco D'Acunto, Ulrike Malmendier and Juan Ospina

Abstract: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals' inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation---which excludes grocery prices---to design expectations-based policies might lead to systematic mistakes.

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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Gender Roles Distort Women's Economic Outlook

Abstract: Gender roles place women and men into different environments in their daily lives, where they observe different economic signals and make different experiences. We show that these differences in everyday exposure distort women’s perceptions of key economic variables, also in areas that do not hold any gender connotation. Our analysis uses novel data of a representative US sample that combines detailed information about the distribution of shopping duties in couples, their corresponding exposure to price signals, and their individual economic expectations. Complying with traditional gender roles, women do most of the grocery shopping, which exposes them to high and volatile changes in grocery prices. This exposure increases women’s perception of current inflation and their expectation of future inflation, relative to men. The distortion spills over to beliefs about house prices and the stock market, as well as perceptions of their own financial situation and the economy overall, which can have detrimental consequences for women’s economic choices and outcomes, including gender inequality in the accumulation of wealth.

2017 AEA, ECB Conference on 'Understanding inflation: lessons from the past, lessons for the future', Ifo Conference on Macro and Survey Data Cleveland Fed Conference on Inflation

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Managing Households Expectations with Simple Economic Policies

with Francesco D'Acunto and Daniel Hoang

Media Coverage: Bloomberg Surveillance, Die Welt, VoxEU, Econbrowser

Abstract: Managing households' expectations directly is a novel policy tool to stimulate the economy by lowering the incentives to save, but so far policies based on this idea have been barely effective. We argue that simplicity is a crucial and yet neglected feature of effective policies that target households instead of financial-market participants. We illustrate this point using novel micro data for a representative population to compare households' reactions to unconventional fiscal policy and forward guidance announcements. Both policies aim to stimulate consumption via raising households' inflation expectations, but to understand the implications of forward guidance households need sophistication in economic theory, which is not true for unconventional fiscal policy. Consistent with our conjecture, households' inflation expectations, consumption, and saving propensities react substantially to unconventional fiscal policy announcements, irrespective of households' sophistication. Instead, households' expectations, contrary to those of financial market participants, do not react to forward guidance announcements and hence households' choices do not react either. Our results inform theorists and policy makers on a neglected dimension to assess the channels of transmission of policies targeting households---simplicity.

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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Price Rigidities and the Granular Origins of Aggregate Fluctuations

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 in a simplified model and find 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 U.S. data and find (1) fully 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 because it changes the effective distribution of sector size and network centrality. Our quantitative exercise generates large aggregate fluctuations under different empirically plausible monetary policy rules.

NBER ME 2017, SED 2016, LSE Workshop on Networks in Macro and Finance 2017, AEA 2018

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IQ Expectations and Choice

with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita

Media Coverage: Fazit - das Wirtschaftsblog, Handelsblatt

Abstract: We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking -- they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs 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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Monetary policy communications and their effects on household inflation expectations

with Olivier Coibion and Yuriy Gorodnichenko

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.


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Human Frictions to the Transmission of Economic Policy

with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita

Media Coverage: Fazit - das Wirtschaftsblog

Abstract: Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population of men -- those below the top of the distribution by cognitive abilities (IQ) -- do not change their consumption propensities with their inflation expectations. Low-IQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Our microdata include unique administrative information on cognitive abilities, as well as economic expectations, consumption and borrowing plans, and total household debt from Finland. Heterogeneity in observables such as education, income, other expectations, and financial constraints do not drive these patterns. Costly information acquisition and the ability to form accurate forecasts are channels that cannot fully explain these results. Limited cognitive abilities could be human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household consumption and borrowing 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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Crowdsourcing Financial Information to Change Spending Behavior

with Francesco D'Acunto and Alberto Rossi

Media Coverage: WSJ

Abstract: We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spending affects the reaction monotonically in both directions. Third, users' reaction is asymmetric -- spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts.

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Monetary Momentum

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. 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. Standard return factors and time-series momentum do not span the return drift around FOMC policy decisions. The return drift is a market-wide phenomenon and holds for all industries and many international equity markets. 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.

2017 Colorado Finance Summit, 2017 German Economists Abroad Conference, 2018 MFA

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Punish One, Teach A Hundred: The Sobering Effect of Punishment on the Unpunished

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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Low Inflation: High Default Risk AND High Equity Valuations

with Harjoat S. Bhamra, Christian Dorion and Alexandre Jeanneret

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 grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model 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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