Browsing by Subject "Forward guidance"

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Essays in macroeconomics
(2024-05) Herriford, Trenton; Mueller, Andreas I., 1979-; Andres Drenik; Brent Bundick; Stefano Eusepi
This dissertation consists of three independent chapters, spanning several subfields within macroeconomics. Chapter 1 explores the connection between workers' search for new jobs and their wage expectations. In standard models, workers' expectations about their future real wages determine how much they search for new jobs. But using a panel survey, I show that predicted job search doubles for individuals who expect nominal-wage cuts—even after controlling for their expected real wages. I then develop a search-and-matching model with on-the-job search. The model's main feature is a dynamic game of search and wage setting between matched workers and firms. Adding behavioral worker preferences to the model reproduces the sharp increase in search when workers expect wage cuts, and this mechanism endogenously generates downward nominal wage rigidity. When I calibrate the model to match workers’ job-search response to expecting wage cuts, I find this behavior can explain 2/3 of observed wage freezes. Chapter 2 examines the macroeconomic effects of data releases. Existing research finds that a macroeconomic indicator's first released/announced estimate has effects independent of the indicator’s actual value. However, I find observations from the Great Inflation drive these results, and this finding is especially pronounced for inflation announcements. Specifically, announcing last quarter’s inflation was one percentage point higher than its actual value increased prices two percent over the subsequent year during the Great Inflation—but had no significant effects in the time after. I show this can theoretically be explained by data releases causing self-fulfilling fluctuations, a possibility predicted by the New Keynesian model when I add to it information frictions and when monetary policy does not sufficiently respond to economic conditions. I then calibrate a quantitative New Keynesian model and find nearly all the price response to inflation announcements can indeed be explained by this self-fulfilling mechanism, as opposed to standard effects implied by imperfect information. Chapter 3, which is joint with Brent Bundick and A. Lee Smith, studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around Federal Open Market Committee (FOMC) announcements cannot be summarized by a single measure but, instead, are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing in just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy structural vector autoregression setting, which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.
Essays in macroeconomics and finance
(2022-04-14) Kroner, Tom Niklas; Coibion, Olivier; Boehm, Christoph; Bhattarai, Saroj; Neuhann, Daniel
My dissertation consists of three independent chapters focusing on empirical questions in macroeconomics and finance. In Chapter 1, I study the role of firms’ uncertainty in the transmission of forward guidance to investment. To do so, I employ a quarterly firm-level panel of U.S. publicly traded firms. I measure forward guidance shocks based on unexpected changes in the slope of the yield curve in a 30-minute window around Federal Reserve announcements. I show that firms which are more uncertain adjust their investment as if they are more pessimistic. More uncertain firms adjust their investment relatively more downward for expected monetary tightenings and relatively less upward for expected loosenings. To explain my empirical findings, I construct a New Keynesian model with a high-uncertainty and a low-uncertainty sector. Agents in the high-uncertainty sector are ambiguous (Knightian uncertain) about the informativeness of forward guidance, and choose to take a pessimistic stance due to their ambiguity aversion. The model implies that expansionary forward guidance is less powerful in recessions due to a larger share of uncertain agents. In Chapter 2, joint with Christoph Boehm, we provide evidence for a causal link between the US economy and the global financial cycle. Using a unique intraday dataset, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large—often comparable in size to the response of the S&P 500. Further, US macroeconomic news frequently explains more than 15% of the quarterly variation in foreign stock markets. The joint behavior of stock prices and long-term bond yields suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence is consistent with a direct effect on investors’ risk-taking capacity. Our findings show that a byproduct of the United States’ central position in the global financial system is that news about its business cycle has large effects on global financial conditions. In Chapter 3, joint with Christoph Boehm, we are trying to better understand how FOMC announcements affect the stock market. A large literature uses high-frequency changes in interest rates around FOMC announcements to study monetary policy. These yield changes have puzzlingly low explanatory power for the stock market—even in a narrow 30-minute window. We propose a new approach to test whether the unexplained variation represents monetary policy news or just noise. In particular, we allow for a latent “Fed non-yield curve shock”, which we estimate via a heteroskedasticity-based procedure. Using a test for weak identification, we show that our shock is well identified, that is, the unexplained variation is not just noise. We then go on to show that the shock, signed to increase stock prices, leads to sizable declines in the equity and variance premium, an increase in the 10-year term premium, an increase in short-run inflation expectations, as well as a dollar depreciation against multiple non-safe-haven currencies. Hence, the evidence supports the interpretation that the shock affects risk-appetite and leads to a reverse “flight-to-safety” effect. Lastly, using a method from the computational linguistics literature, we show that our shock can be linked to specific topics discussed in FOMC statements, suggesting that it reflects written communication by the Federal Reserve.