Abstract: I identify exogenous government debt shocks using high-frequency movements in U.S. Treasury futures prices around auction
announcements. In a VAR, these shocks raise interest rates across the yield curve, including the federal funds rate, while prices
increase, output falls, unemployment rises, and the monetary base shrinks. I interpret these findings as evidence of fiscal dominance
and show that a standard monetary-dominant model cannot replicate the empirical impulse responses. In an estimated business cycle
model, I find that debt shocks offset part of the disinflation of the 1980s, contributed to growth in the 1990s, and slowed the
recovery from the Great Recession.
The Uneven Welfare Costs of the Volcker Disinflation
Revise and Resubmit 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 Volker 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. %Welfare costs may be significant for households with nominal liabilities.
We calibrate the model to match the micro and macro moments of the early 1980s 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; just over 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 and unemployment.
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.