Financial Intermediation and Aggregate Demand: A Sufficient Statistics Approach (with Piotr Zoch)

Abstract:  We derive sufficient statistics that describe how the financial sector transmits macroeconomic policies to aggregate demand. Our framework nests models of financial intermediation with various microfoundations and generates crucial aspects of aggregate demand with household heterogeneity. The financial sector supplies liquidity by issuing liquid assets to finance illiquid capital. The elasticities of liquidity supply with respect to returns are sufficient statistics that describe how the financial sector affects aggregate responses to policies. We measure the elasticities with data on price and quantity, sidestepping the difficulty of measuring microfoundations of financial frictions. Quantitatively, these elasticities are central to the debate over the effectiveness of policies targeting the financial sector versus households. In common models analyzing these policies, output responses differ by orders of magnitude due to implicit assumptions about these elasticities. Estimates of the elasticities for the U.S. imply a stronger effect of targeting households than the financial sector.

Attention and Fluctuations in Macroeconomic Uncertainty

Abstract: This paper shows that people's attention to macroeconomic events can generate macroeconomic uncertainty during recessions. In an economy with dispersed information, agents exert costly attention to learn about an unknown aggregate state of the economy. Under certain conditions, agents pay more attention when they expect the economy to be in a bad state, and their collective response increases four measures of uncertainty that are countercyclical in the data: (i) aggregate output volatility, (ii) forecast uncertainty about aggregate output, (iii) forecast dispersion about aggregate output, and (iv) cross-sectional output dispersion among agents. Moreover, agents' attention response produces a cyclical pattern of expectation updates consistent with evidence from forecast surveys, in contrast to the pattern generated by countercyclical volatility shocks. When calibrated to the U.S. economy, countercyclical attention can account for more than half of the fluctuations in three of the four measures of uncertainty. Because fluctuations in attention and uncertainty are higher-order properties of the model, a new method is developed to solve higher-order dynamics of the equilibrium under an infinite regress problem.

Nominal Maturity Mismatch and the Redistributive Effects of Inflation (with Ezra Karger)

(draft coming soon)

Abstract: We use data on household balance sheets and inflation expectations to document the redistributive effect of unexpected increases in inflation. On net, rich households are net nominal lenders and poor households are net nominal borrowers. So, unexpected inflation act as a progressive tax, transferring wealth from the rich to the poor. However, there is a maturity mismatch in households' nominal positions: nominal assets have shorter average maturity than nominal liabilities, and this mismatch is larger for poorer households. As a result, when inflation unexpectedly increases, poor households experience immediate declines in their ability to pay for goods and services, even as their life-time wealth increases. We study the welfare implications of nominal maturity mismatch in a heterogeneous agent model and show that unexpected inflation shocks can decrease welfare for households who are liquidity constrained, even as net wealth for these households rises.

Higher-Order Approximations of Dispersed Information Models

Media Competition for Attention