Publications
Policy Space Index: Short-term Response to a Catastrophic Event (2023) (with Alexei Kireyev)
Economic Analysis and Policy, Volume 79, September
What policy space does a country have for a short-term response to a catastrophic event? To quantify this space, the paper proposes a policy space index. The index combines a quantitative, albeit relatively limited and narrow, fiscal space concept with the indicators of nominal monetary space and reserve space. Each nominal policy space indicator is then adjusted for individual country’s institutional features, such as the status of its currency, income group, access to capital markets, debt distress level, and the exchange rate regime. The final policy space index is derived as a composite of the three nominal policy space indicators, each adjusted for five institutional features. This index is different from the approach to measure fiscal space at the IMF and requires more work before it can be used operationally. The proposed index allows measuring the overall policy space in each country directly in percent of GDP. By way of illustration, the paper applies the index to the Covid-19 crisis.
Working Papers
I develop a framework of monetary, fiscal, and capital account interactions for small open economies (SOEs) to study how the price level and exchange rate are determined under different policy contexts. I identify three policy regimes where the equilibrium is uniquely determined and explore implications for inflation dynamics. The first two regimes generalize well-known monetary and fiscal dominance regimes by adding a condition that capital account policies are consistent with external solvency. The third regime---capital account dominance---arises when capital account policy targets the (real) exchange rate, thereby uniquely determining the price level. This causes inflation to be driven by current account imbalances rather than by monetary or fiscal policy, thus offering a new view of how policy can control inflation in a SOE. I highlight two implications for the conduct of monetary policy in SOEs: (i) achieving price stability requires both fiscal and capital account policy backing (ii) strict inflation targeting and managed exchange rates are inconsistent with intertemporal current account solvency. Lastly, as an application, I provide narrative and empirical evidence showing that Chile was a case of capital account dominance during the late 1980s.
Macroeconomic Transmission of (Un-) Predictable Uncertainty Shocks (with John Rogers and Jiawen Xu)
We document significant upward bias in estimates of the transmission of uncertainty shocks to real activity found in prominent studies of uncertainty's macroeconomic transmission. We show this bias is due to predictability in these uncertainty shocks. The predictability stems not from the use of ex-post revised data rather than real-time data, but from failure to control for uncertainty's endogenous response to changes in economic conditions. We demonstrate two ways of purging uncertainty shocks of their predictable component and find that uncertainty's transmission to output and employment is much smaller than traditional estimates. Instead, we find that uncertainty's relationship with aggregate real activity is more the result of its role as an amplification mechanism for other macroeconomic and financial shocks.
I find significant evidence pointing to the existence of an endogenous component within shocks identified by two prominent monetary policy uncertainty (MPU) measures found in the recent literature: Husted, Rogers & Sun's (2019) and Bauer, Lakdawala & Mueller's (2019). I show that this endogeneity stems from the failure of usual VAR specifications to control for MPU's endogenous responses induced by changes in overall macroeconomic, financial and uncertainty conditions. I compute a new MPU shock by expanding the MPU equation to control for MPU's interaction with the stance of the economy and I follow Romer & Romer (2004) in estimating a hybrid VAR which includes this new MPU shock as an endogenous variable. VAR
and local projection evidence from this hybrid specification reveal that this approach is able to produce more robust impulse responses and, notably, to significantly reduce discrepancies between impulse responses derived by using news- and market-based measures.
Work in Progress
The Cyclicality of Fiscal Policy and Inflation
A Debt-Based Trilemma for Small Open Economies: The Role of External Debt