A Structural Investigation of Quantitative Easing
Review of Economics and Statistics, forthcoming
We provide evidence that the Federal Reserve's large-scale asset purchases actually reduce inflation. Using nonlinear Bayesian methods that fully account for the binding zero lower bound (ZLB), we estimate a macro-finance DSGE model. Counterfactual analysis suggests that by easing financing conditions, quantitative easing facilitated an increase in aggregate investment. The resulting expansion of firms’ production capacities lowered their marginal costs. These disinflationary supply side effects dominated over the inflationary effects coming from the higher aggregate demand. At the ZLB, the concomitant rise in real interest rates in turn induced a net fall in aggregate consumption.
Estimation of DSGE Models with the Effective Lower Bound
Journal of Economic Dynamics and Control, 2023
We propose a set of tools for the efficient and robust Bayesian estimation of medium- and large-scale DSGE models while accounting for the effective lower bound on nominal interest rates. We combine a novel nonlinear recursive filter with a computationally efficient piece-wise linear solution method and a state-of-the-art MCMC sampler. The filter allows for fast likelihood approximations, in particular of models with large state spaces. Using artificial data, we demonstrate that our methods accurately capture the true model parameters even with very long lower bound episodes. We apply our approach to analyze post-2008 US business cycle properties.
Monetary Policy and Speculative Asset Markets
European Economic Review, 2022
I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, that potentially cause endogenous, nonfundamental bubbles and bursts. Booms in asset prices improve firms financing conditions and are therefore deflationary. These features significantly improve the power of the model to replicate empirical key moments. A monetary policy that targets asset prices can dampen financial cycles and reduce volatility in asset markets (dampening effect). This comes at the cost of creating an additional channel through which asset price fluctuations transmit to macroeconomic fundamentals (spillover effect). I find that unless financial markets are severely overheated, the undesirable fluctuations in inflation and output caused by the spillover effect more than outweigh the benefits of the dampening effect.
Efficient Solution and Computation of Models with Occasionally Binding Constraints
Journal of Economic Dynamics and Control, 2022
Structural estimation of macroeconomic models and new HANK-type models with extremely high dimensionality require fast and robust methods to efficiently deal with occasionally binding constraints (OBCs). This paper proposes a novel algorithm that solves for the perfect foresight path of piecewise-linear dynamic models. In terms of computation speed, the method outperforms its competitors by more than three orders of magnitude. I develop a closed-form solution for the full trajectory given the expected duration of the constraint. This allows to quickly iterate and validate guesses on the expected duration until a perfect-foresight equilibrium is found. A toolbox, featuring an efficient implementation, a model parser and various econometric tools, is provided in the Python programming language. Benchmarking results show that for medium-scale models with an occasionally binding interest rate lower bound, more than 150,000 periods can be simulated per second. Even simulating large HANK-type models with almost 1000 endogenous variables requires only 0.2 milliseconds per period.
Revisions & Working Papers
Rational vs. Irrational Beliefs in a Complex World
R&R @ Journal of Economic Dynamics and Control
Can boundedly rational agents survive competition with fully rational agents? We develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational backward looking agents and evolving market shares depending on their relative performance. Our novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dynamics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamental value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks.
The Hockey Stick Phillips Curve and the Zero Lower Bound
R&R @ Journal of Economic Dynamics and Control
We show that the interplay between a binding effective lower bound (ELB) and the costs of external financing weakens the disinflationary effect of financial shocks. In normal times, factor costs dominate firms' marginal costs and hence inflation; credit spreads and the nominal interest rate, which together constitute external financing costs, balance out. When nominal rates are constrained by the ELB, larger spreads can in parts offset the effect of lower factor costs on firms' price setting. The Phillips curve is hence flat at the ELB, but features a positive slope in normal times and thus an overall hockey stick shape. This mechanism also weakens the effects of forward guidance on inflation, since such policy reduces spreads and thereby financing costs.
HANK on Speed: Robust Nonlinear Solutions using Automatic Differentiation
(under review)
Building on the technique of automatic differentiation, I propose an iterative method to quickly and accurately find nonlinear perfect foresight solutions for models with heterogeneous agents and many aggregate equations. The method allows to account even for strong nonlinearities such as, e.g., several aggregate and disaggregate occasionally binding constraints, and the transition dynamics of the full cross-sectional distribution. The canonical heterogeneous agent New Keynesian (HANK) model can typically be solved within a few seconds. I provide a powerful and easy-to-use reference implementation which levers the virtues of modern open source software. The importance of this paradigm for the future progress in economic research is highlighted and discussed. The method is used to study a permanent shift in redistribution policy in a large-scale HANK model featuring households portfolio choice, capital formation and many aggregate frictions. Since firms wish to deplete their capital stock, the transition path is characterized by a long-lasting deflationary episode. This effect may be intensified by a binding lower bound on interest rates or downward wage rigidity.
An Ensemble MCMC Sampler for Robust Bayesian Inference
(under review)
This paper proposes a Differential-Independence Mixture Ensemble (DIME) sampler for the Bayesian estimation of structural models. DIME allows the estimation of models that are computationally expensive to evaluate with challenging, multimodal, high-dimensional posterior distributions and ex-ante unknonw properties. It combines the advantages of gradient-free global multi-start optimizers with the properties of Monte Carlo Markov chains to quickly explore the typical set. DIME is used to estimate a two-asset heterogeneous agent New Keynesian ("HANK") model, for the first time including the households' preference parameters. The results point towards a less accentuated role of household heterogeneity for the empirical macroeconomic dynamics.
The Empirical Performance of the Financial Accelerator since 2008
(under review)
We evaluate the empirical performance of financial frictions á la Bernanke et al. (1999) during and after the Global Financial Crisis. We document that in an ex-post analysis, these frictions do not improve the canonical medium-scale DSGE model's ability to explain macroeconomic dynamics during the Great Recession. The reason is that in the estimated model with financial frictions, the drastic post-2008 collapse of investment causes firms' leverage to decline, which in the model would trigger a counterfactual narrowing of the credit spread. This would imply financial decelerator effects for the post-2008 period. Additionally, the estimated model only attributes a minor role to the associated financial shocks. These findings are confirmed independently for US and euro area data. Our analysis is based on nonlinear Bayesian methods, which account for the binding effective lower bound on nominal interest rates.