Work In Progress

Going Negative at the ZLB: The Effects of Negative Rates on Bank Profitability (Job Market Paper)

Latest draft

In the aftermath of the Great Recession several central banks started setting negative nominal interest rates in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the interest rates that commercial banks charge on loans, but they can also hurt bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. In this context, if the central bank intends to fight a recession by setting negative rates it must take into account that doing so can hurt bank profitability, so the benefits of an interest rate cut might be smaller than usual. I use bank-level data to provide evidence for the mechanisms in the model and to estimate its main parameters. I find that monetary policy in negative territory is between 60% and 90% as effective (in welfare terms) as in positive territory, depending on the importance of bank equity for lending.


The Cyclical Sensitivity in Estimates of Potential Output (with Olivier Coibion and Yuriy Gorodnichenko)

Forthcoming in Brookings Papers in Economic Activity (Fall 2018 Edition). NBER Working Paper Version

Selected coverage: Financial Times, Equitable Growth, VoxEU, ECB

The fact that declines in output since the Great Recession have parlayed into equivalent declines in measures of potential output is commonly interpreted as implying that output will not return to previous trends. We show that real-time estimates of potential output for the U.S. and other countries respond gradually and similarly to both transitory and permanent shocks to output. Observing revisions in measures of potential output therefore tells us little about whether changes in actual output will be permanent or not. Some structural VAR methodologies can avoid these shortcomings. These approaches suggest a much more limited decline in potential output following the Great Recession. 


Neo-Keynesian Trade: The Effects of Nominal Rigidities on the Gains from Trade (with Andrés Rodríguez-Clare)

Models in international trade usually incorporate richness across regions and sectors, but they have little room for dynamics or nominal rigidities. Models in open economy macroeconomics are typically the opposite. This divide has prevented economists from studying important topics that require both richness in the trade structure and nominal rigidities. We build a dynamic model that unifies a detailed trade pattern across regions and sectors with monetary non-neutrality. The nominal friction, a downwardly rigid wage, can lead to unemployment in the face of a negative shock if the monetary authority is unwilling or unable to inflate the economy sufficiently, and this effect can vary substantially across regions depending on their industrial composition. We develop two applications of our framework, the unemployment implications of the China shock between 2000 and 2007, and trade or currency wars at the ZLB.


Indian Demonetization and Real Effects (with Rupal Kamdar and Walker Ray)

On November 8, 2016, India demonetized all outstanding 500 and 1,000 rupee notes, removing 86% of cash in circulation. New 500 and 2,000 rupee notes were eventually issued, but the process of printing and distribution took longer than anticipated. Around 98% of transactions in India occur in cash, so demonetization had profound consequences. The move was done for motives related to counterfeiting and money laundering and, as such, was unrelated to the state of the Indian macro-economy. Therefore Indian demonetization can serve as a unique natural experiment to study the real effects of monetary shocks, price rigidities and relative substitution patterns following a liquidity crunch. This project uses dis-aggregated data on prices and quantities of different consumption categories across regions in India to study these topics. Preliminary results on the prices of agricultural goods suggest that prices respond strongly and somewhat persistently to demonetization.

The material on this website does not necessarily reflect the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System. 

Tel. 510-646-6801  I