Assistant Professor of Economics
London School of Economics
Research Affiliate, Centre for Economic Policy Research
Member, Centre for Macroeconomics
Department of Economics
London School of Economics and Political Science
Tel: +44 207 107 5022
Fax: +44 207 955 6592
Office hour: Thursdays 10.15-12.15 in 32L.1.09
Research interests: Macroeconomics, Monetary Economics, Political Economy, Housing Markets
Conventional and Unconventional Monetary Policy Rules, July 2017
Abstract: This essay examines the challenges in devising rules for unconventional monetary policy suitable for a post-crisis world. It is argued that unconventional monetary policy instruments are a poor substitute for conventional interest-rate policy in stabilizing the economy and in insulating monetary policy from political pressures. Some suggestions for the reform of inflation targeting are made to reduce the need for unconventional policy instruments in the future.
Political Specialization, June 2017, (with Bernardo Guimaraes) - CEPR discussion paper #11880; CfM discussion paper #2017-10
Abstract: This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world.
The Decision to Move House and Aggregate Housing-Market Dynamics, May 2017, (with Rachel Ngai) - CEPR discussion paper #10346; CfM discussion paper #2016-21, (earlier version entitled Moving House)
Abstract: Using data on house sales and inventories, this paper shows that housing transactions are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The number of transactions has implications for welfare because each transaction reduces the degree of mismatch for homeowners. The quantitative importance of the decision to move house is shown in two applications: understanding the housing market boom, and the welfare consequences of housing transactions taxes.
A Tale of Two Inflation Rates: House-Price Inflation and Monetary Policy, September 2016.
Abstract: Price stability should be the ultimate goal of monetary policy, but which of many money prices should a central bank stabilize? A common argument is that the consumer price index should be stabilized because goods prices are sticky, with this being the key friction that monetary policy should mitigate. This paper presents a heterogeneous-agent, incomplete-markets model where households buy and sell houses over their lifetimes with purchases financed by nominal mortgage debt. The model includes aggregate risk from productivity shocks as well as financial shocks to borrowing constraints. The model generates a `financial cycle' where shocks that affect nominal house prices have real effects on balance sheets and lending, which feeds back into house prices. As a consequence, house-price fluctuations have implications for consumption volatility, as well as production. In this context, it is argued that the price stability central banks should seek is stability of nominal house prices. Achieving this improves risk sharing and promotes productive efficiency.
Guarding the Guardians, November 2015, (with Bernardo Guimaraes) - published in Economic Journal, forthcoming; CEPR discussion paper #8855; CEP discussion paper #1123, (earlier versions entitled A Model of Equilibrium Institutions, Power Sharing, Rents, and Commitment, and A Model of the Rule of Law)
Abstract: Good government requires some restraints on the powerful, but how can those be imposed if there is no-one above them? This paper studies the equilibrium allocation of power and resources established by self-interested incumbents under the threat of rebellions from inside and outside the group in power. Commitment to uphold individuals' rights can only be achieved if power is not as concentrated as incumbents would like it to be, ex post. Power sharing endogenously enables incumbents to commit to otherwise time-inconsistent laws by ensuring more people receive rents under the status quo, and thus want to defend it.
The Ins and Outs of Selling Houses, September 2015, (with
Abstract: This paper documents the cyclical properties of housing-market variables (sales, new listings, time-to-sell, the number of houses for sale, and prices), which are shown to be volatile, persistent, and highly correlated with each other. Is the observed volatility in these variables due to changes in the speed at which houses are sold (outflow rate) or changes in the number of houses that are put up for sale (inflow rate)? An inflow-outflow decomposition shows that the inflow rate accounts for almost all of the fluctuations in sales volume. The paper then shows that a search-and-matching model with endogenous moving subject to housing demand shocks performs well in explaining fluctuations in housing-market variables. A housing demand shock induces more moving (acting like a moving-rate shock) and increases the supply of houses on the market (acting like a housing supply shock), thus one housing demand shock replicates three correlated reduced-form shocks that would be needed to match the relative volatilities and correlations among key housing-market variables.
Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting, April 2014 - published in Brookings Papers on Economic Activity, Spring 2014, pp. 301-373; working paper with appendices; CEPR discussion paper #9843; CEP discussion paper #1209
Abstract: For many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment stream. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper shows that when debt contracts are written in terms of money, a monetary policy of nominal GDP targeting improves the functioning of financial markets. By insulating households' nominal incomes from aggregate real shocks, this policy effectively achieves risk sharing by stabilizing the ratio of debt to income. The paper also shows that when there is price stickiness, the objective of improving risk sharing should still receive considerable weight in the conduct of monetary policy relative to stabilizing inflation.
Sales and Monetary Policy, January 2010, (with Bernardo Guimaraes) - published in American Economic Review, vol. 101(2), pp. 844-76, April 2011; Online appendix; CEPR discussion paper #6940; CEP discussion paper #887
Abstract: A striking fact about pricing is the prevalence of "sales": large temporary price cuts followed by prices returning exactly to their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with different price sensitivities. Even if firms can adjust sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility seen in individual prices due to sales does not translate into flexibility of the aggregate price level.
Intrinsic Inflation Persistence, October 2010 - published in
Journal of Monetary Economics, vol. 57(8), pp. 1049-1061, November
2010; Online appendix; CEP discussion paper #837, (earlier version entitled Structural Inflation Persistence)
Abstract: Empirical evidence suggests that inflation determination is not purely forward looking, but models of price setting have struggled to rationalize this finding without directly assuming backward-looking pricing rules for firms. This paper shows that intrinsic inflation persistence can be explained with no deviation from optimizing, forward-looking behaviour if prices that have remained fixed for longer are more likely to be changed than those set recently. A relationship between the probability of price adjustment and the duration of a price spell is shown to imply a simple "hybrid" Phillips curve including lagged and expected inflation, which is estimated using macroeconomic data.
Robustly Optimal Monetary Policy, May 2008 -
CEP discussion paper #840, (earlier version entitled
Resistance to Persistence: Optimal Monetary Policy Commitment)
Abstract: This paper analyses optimal monetary policy in response to shocks using a model that avoids making specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself.
Inflation Persistence When Price Stickiness Differs Between
Industries, May 2007 - CEP discussion paper #838
Abstract: There is much evidence that price-adjustment frequencies vary widely across industries. This paper shows that inflation persistence is lower with heterogeneity in price stickiness than without it, taking as given the degree of persistence in variables affecting inflation. Differences in the frequency of price adjustment mean that the pool of firms which responds to any macroeconomic shock is unrepresentative, containing a disproportionately large number of firms from industries with more flexible prices. Consequently, this group of firms is more likely to reverse any initial price change after a shock has dissipated, making inflation persistence much harder to explain.
Monetary Policy under Labour, (with Timothy Besley) - published in National Institute Economic Review, vol. 212(1), pp. R15-R33, April (2010)
Abstract: This paper analyses Labour's record on monetary policy and the record of the MPC which it created. The paper begins by discussing the conceptual framework and institutions behind inflation targeting as it operates in the UK. We then discuss the successes that it enjoyed up to 2007 and debate the lessons that are being learned as a consequence of the experience since then. We then raise some of the formidable challenges that UK monetary policy must now face up to including maintaining the credibility of the inflation targeting regime in the face of greater interdependence between monetary and fiscal policy, and between monetary policy and support to the banking system and financial markets.
Last updated: 14th July 2017