Job Market Paper
Supply Chain Disruptions, Inflation and Monetary Policy
Last Draft: November 2023
Abstract: In this paper I study inflationary consequences of supply chain disruptions caused by the COVID-19 pandemic. Specifically, this paper quantifies contribution of increased delivery times of intermediate goods used in production to elevated inflation readings observed in the U.S. in recent years, and compares that contribution to those coming from other forces that may have boosted inflation during the post-pandemic recovery. To do that I develop a two-sector business cycle model with sticky prices and wages in which one of the sectors can be subject to delayed deliveries, binding capacity constraints and, therefore stockouts. I find that out of 7.2% of cumulative increase in the U.S. core CPI index from December 2019 to December 2021, 6.1 pps can be attributed to increased delivery times. However, my analysis suggests that since early 2022 contribution of increased delivery times to U.S. inflation started to fade out slowly and became by and large deflationary as supply chains pressures began to ease. My decomposition exercise shows that monetary policy started playing an important role in boosting inflation recently reflecting the inconsistency between realized path of the federal funds rate and the one implied by a simple Taylor Rule. This paper shows that annual inflation (measured as a percentage change in core CPI index) in the U.S. could have been at 2%, if the path of recent interest rate hikes was steeper and the federal funds rate was at 6% as of June 2023. Moreover, this counterfactual scenario does not imply significant slowdown in overall production or real personal consumption, suggesting that widely discussed "soft landing" was indeed possible.
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.
Work in Progress
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.
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