Job Market Paper
Monetary Policy Analysis With Heterogeneous Unemployment Dynamics
Abstract:
This paper examines the welfare effects of monetary policy rules targeting unemployment rates across skill levels within a DSGE framework. I develop a New Keynesian model with heterogeneous agents and asymmetric search and matching frictions, calibrated to reflect the empirical responses of low- and high-skill unemployment rates to
identified monetary policy shocks. I find that the optimal monetary policy rule should respond to both low- and high-skill unemployment, alongside inflation. This need arises
because, unlike standard New Keynesian models, the inclusion of skill-specific matching frictions introduces a congestion externality that elevates unemployment levels inefficiently.
While a robust response to inflation remains welfare improving, responding to output consistently reduces welfare outcomes.
Working Paper
How Much Has the Fed’s New Policy Framework Contributed to Inflation? with Dario Cardamone, Victoria Consolvo and Eric Sims
Abstract:
We evaluate the impact of the Federal Reserve’s August 2020 change in policy framework on inflation. Using a representative agent New Keynesian model, we simulate inflationary shocks to the economy and compare the path of inflation under a standard Taylor rule (STR) to that under asymmetric output growth responses (AR) and average inflation targeting (AIT). We find that from 2020-Q3 to 2021-Q2, a policy rule with both AR and AIT generates higher inflation than the STR. After 2021, a rule with AIT alone generates lower inflation than either the STR or a rule containing both AIT and AR.
Working Paper
The Borrowing Cost Channel of Monetary Transmission with Soo Kim
Abstract:
This paper examines the effect of monetary policy on the extensive margin of the production sector when the borrowing cost of the firm differs by its productivity. Consistent with the literature and the empirical findings, (i) monetary policy stimulates the entry of the firms not only through the trade-off between increased demand and increased cost, but also directly through reducing the borrowing cost. However, in the current calibration of the model, (ii) monetary policy might offset the initial increase in output through the demand channel by directly attracting less efficient firms. In contrast, a model without size dependent interest rate exhibits a pronounced output response and moderate inflation sensitivity, lacking the economic stabilization conferred by differentiated borrowing costs. Moreover, a model without size dependent interest rate and firm entry/exit mechanisms displays amplified output and inflation responses, indicative of a standard New Keynesian approach that abstracts from firm dynamics. Inclusion of size dependent borrowing costs and dynamic firm behavior in our model dampens these responses, suggesting a stabilizing effect on the economy and highlighting the transitory nature of policy impacts, which are absent in the standard framework.