Research

Abstract: U.S. households’ housing price expectations deviate systematically from full-information rational expectations: (i) expectations are updated on average too sluggishly, (ii) expectations initially underreact but subsequently overreact to housing price changes, and (iii) households are overly optimistic (pessimistic) about housing price growth when the price-to-rent ratio is high (low). We show that weak forms of housing price growth extrapolation allow to simultaneously replicate the behavior of housing prices and these deviations from rational expectations as an equilibrium outcome. Embedding housing price growth extrapolation into a sticky price model with a lower-bound constraint on nominal interest rates, we show that lower natural rates of interest increase the volatility of housing prices and thereby the volatility of the natural rate of interest. This exacerbates the relevance of the lower bound constraint and causes Ramsey optimal inflation to increase strongly with a decline in the natural rate of interest.

Abstract: I propose an approach to quantify attention to inflation and show that attention declined after the Great Inflation period. This decline in attention has important implications for monetary policy as it renders managing inflation expectations more difficult and can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. As attention declines the optimal policy response is to increase the inflation target. The lower bound fundamentally changes the normative implications of declining attention: lower attention raises welfare absent the lower-bound constraint, whereas it decreases welfare when accounting for the lower bound. 

Awards:

• Finalist Paper for the Young Economist Prize 2021 from the QCGBF

Abstract: At the outbreak of the recent inflation surge, the public’s attention to inflation was low but increased quickly once inflation started to rise. In this paper, I quantify when and by how much the public's attention to inflation changes, and derive the macroeconomic implications of these attention changes. I estimate an attention threshold at an inflation rate of about 4%, and that attention doubles when inflation exceeds this threshold. Adverse supply shocks become more inflationary in times of high attention, and the increase in people's attention to inflation in 2021 accounts for half of the subsequent supply-driven inflation. I develop a model accounting for the attention threshold and show that shocks that are usually short lived lead to a persistent surge in inflation if they induce an increase in people's attention. The attention threshold further lengthens the last mile of disinflation after an inflation surge, and leads to an asymmetry in the dynamics of inflation.

Abstract: We develop a heterogeneous agent New Keynesian model in which households' expectations underreact to aggregate news and in which they are unequally exposed to business cycles, both consistent with the data. Unlike existing models, our model simultaneously accounts for the empirical findings that monetary policy affects consumption largely through indirect effects, income risk is countercyclical conditional on monetary policy shocks, and forward guidance is less powerful than contemporaneous monetary policy. While after persistent monetary policy shocks, heterogeneous exposure and households' underreaction counteract each other, supply shocks are unambiguously amplified, offering a theory how supply shocks can trigger large inflation spikes.

Awards:

• Finalist for the European Central Bank's 2022 Young Economist Prize

• Winner of the Young Scholar Award for the best paper presented by a graduate student from the Society for Nonlinear Dynamics and Econometrics (SNDE)

• Finalist Paper for the Young Economist Prize 2022 from the QCGBF

Abstract: We study how firms' access to (big) data shapes the transmission of monetary policy to their capital investment and their exposure to cyclical fluctuations. Using employer-employee data of job characteristics to quantify firms' data intensity, we show that data-intensive firms adjust their capital investment more strongly in response to monetary policy shocks, particularly to expansionary shocks. Within the set of firms with access to data, the market shares of firms with superior access to data are more procyclical. To understand these findings, we develop a tractable theoretical framework in which data enters investment decisions by favorably affecting a firm's productivity and reducing its volatility. Data accumulates endogenously through a data feedback loop, i.e., firms that produce more accumulate more data. The model predicts that firms with access to superior data respond more strongly to aggregate fluctuations if and only if the data feedback loop is sufficiently strong. A strong data feedback loop thus renders the effectiveness of monetary policy procyclical. The model uncovers potential unintended consequences of digital markets regulation, such as the EU GDPR, as those policies weaken the effectiveness of monetary policy.

Abstract: Business cycle models often abstract from persistent household heterogeneity, despite its potentially significant implications for macroeconomic fluctuations and policy. We show empirically that the likelihood of being persistently financially constrained decreases with cognitive skills and increases with overconfidence thereon. Guided by this and other micro evidence, we add persistent heterogeneity in cognitive skills and overconfidence to an otherwise standard HANK model. Overconfidence proves to be the key innovation, driving households to spend instead of precautionary save and producing empirically realistic wealth distributions and hand-to-mouth shares and MPCs across the income distribution. We highlight implications for various fiscal policies.