Abstract: I identify exogenous government debt shocks using high-frequency movements in US Treasury futures prices around Treasury financing announcements.
In a proxy VAR, these shocks result in a surge in inflation and deep reduction in output, even as the monetary base contracts and primary deficits remain stagnant.
Yields and bank balance sheets suggest tighter financial conditions. A New Keynesian model augmented with financial intermediaries can generate the joint rise in inflation
and declines in output and the monetary base: banks' absorption of new debt tightens firm financing, and higher yields combined with Treasury cash accumulation drain reserves.
Under a standard monetary dominance closure, output and inflation responses are far smaller than in the data. Fiscal dominance amplifies both responses and substantially
narrows the quantitative gap.
The Uneven Welfare Costs of the Volcker Disinflation
Resubmitted for R&R at JPE Macro
Abstract: We use a Heterogeneous Agent New Keynesian (HANK) model to quantify the distribution of welfare gains and losses of the US Volcker disinflation.
In the long run households prefer low inflation, but the Volcker disinflation requires a transition period characterized by a sharp increase in the real interest
rate and unemployment, as well as a redistribution from net nominal borrowers to net nominal savers. We calibrate the model to match the micro and macro moments of
the late 1970s high-inflation environment and examine the actual changes in the nominal interest rate and inflation over the Volcker disinflation. While aggregate
welfare gains are positive, the effects are highly skewed across households; almost 50 percent would prefer to avoid the disinflation. This share depends negatively
on the liquidity value of money, positively on the average duration of nominal borrowing, and positively on the short-run increase in the real interest rate.
Abstract: I embed a nominal GDP level target in a Taylor-type rule and compare the volatilities of output,
inflation, and the nominal rate to a standard, inflation-target Taylor rule. I demonstrate analytically that the source
of the shock matters for relative variances. With an NGDP level target, a productivity shock results in more stable output
but more volatile inflation. Cost push shocks and demand shocks result in more stable output and inflation. These results are,
with small caveats, confirmed in an estimated quantitative model. Last, I impose a zero lower bound (ZLB) and simulate the model
under both targets. An NGDP level target hits the ZLB less often than an inflation target at the cost of longer sessions at the
ZLB. Switching to an NGDP level target while at the ZLB leads to quicker economic recovery through the Fed's use of forward
guidance.