Work in Progress
Supply Chain Disruptions, Inflation and Monetary Policy
Abstract: Widespread supply chain disruptions caused by the COVID-19 pandemic are often viewed as one of major contributors to extremely elevated levels of inflation observed in advanced economies starting from 2021. For instance, supply chain disruptions and/or bottlenecks as a major contributor to inflationary pressure in the US are now cited by the Fed in its official publications approximately seven times more often than before the pandemic. However, standard macroeconomic models are usually silent on international supply chains as a potential source of business cycles. This project aims to fill this gap and develops relatively tractable theoretical framework to study supply chain shocks and their propagation into wider economy. In the model supply chain shock is defined as an exogenous increase to average delivery time of intermediate inputs used in production. I then use the model to quantify the contribution of increased delivery times to elevated
inflation numbers in the US in 2021-22 and access their ability to explain the ongoing inflation surge.
Monetary Policy Under Hysteresis
Last Draft: Coming Soon
Abstract: Recent evidence suggests that monetary policy persistently affects labor and total factor productivity and can be non-neutral in the longer run. This paper studies policy implications of the long-run monetary non-neutrality as well as possible sources of why monetary policy can influence the economywide productivity in the first place. Using the data on labor market conditions in R&D intensive sectors of the U.S. economy I document that restrictive monetary policy significantly depresses labor hours in these sectors which can be viewed as possible explanation for the former observation. I then develop a business cycle model extended with endogenous technological knowledge formation mechanism and endogenous growth. Using this model I estimate that the long-run losses from 1 p.p. nominal interest rate hike can reach up to 2.8-6.8% of the pre-hike level of output. Under hysteresis central bank's priorities should be shifted away from inflation stabilization goal toward the objective of stabilizing the output instead. The optimal (Ramsey) policy regime implies a decisive nominal interest rate cut in response to negative inflationary shock. The optimized simple policy rule requires substantially higher weight on the GDP growth term in the central bank's reaction function though this does not fully allow the latter to achieve the dynamics of the main macroeconomic aggregates implied by the optimal (Ramsey) policy regime conditional on negative inflationary shock.
Working Papers
Learning-by-Doing and Monetary Policy
Last Draft: August 2022
Abstract: Most of the modern business cycle models do not allow an interaction between monetary policy and economy's productivity. This paper departs from that baseline and develops a simple New Keynesian model augmented with an assumption of endogenous productivity. In the model economy's productivity is formed through the means of leaning-by-doing: higher labor effort leads to endogenous learning and accumulation of human capital over time increasing future labor productivity and vice versa. Consistent with recent empirical findings, it is shown that in such environment monetary policy shocks (as well as other aggregate shocks) can be much more persistent. Spillover effect arising from learning-by-doing makes the central bank willing to commit to much tighter policy stance under optimal policy regime conditional on negative inflationary shock. Simple policy rules that prioritize inflation objective over output gap stability goal can help to approximate optimal policy to some extent. Under certain conditions, policy rule that targets economy's productivity may be even more welfare-improving.
Where Would We Be if the Fed Followed Its Own Rules?
Last Draft: December 2022
Abstract: This article shows what level of the federal funds rate would prevail in current economic conditions if the Fed exactly followed the Taylor Rule. My analysis suggests that at the time of the first post-pandemic liftoff in March 2022 the implied federal funds rate was at least 4.14% – more that 3.9p.p. above its factual level at the time. Moreover, the liftoff itself was supposed to begin in March 2021 rather than one year later. To access the scale of excess policy accommodation I calculate an average spread of the federal funds rate to the Taylor Rule benchmark. Looking at this statistic in retrospect I document that the current level of implied excess policy accommodation is pretty much comparable to the one observed in early 1970s – right before the Great Inflation period. Even after a series of substantial rate hikes in 2022, the stance monetary policy in the US remains too loose compared to the Taylor Rule's recommendations.
Discussions
◦ Is the Bank of Canada Concerned about Inflation or the State of the Economy?
aa by Ke Pang and Christos Shiamptanis aa Slides
◦ Asset Liquidity, Private Information Acquisition, and Monetary Policy
aa by Xinchan Lu aa Slides