Assistant Professor of Economics
London School of Economics
Department of Economics
London School of Economics and Political Science
Tel: +44 207 107 5022
Office hour: On sabbatical in Winter Term 2023
Research interests: Macroeconomics, Monetary Economics, Political Economy, Housing Markets
The Ins and Outs of Selling Houses: Understanding Housing-Market Volatility, November 2023, (with Rachel Ngai) - CEPR discussion paper #14331; CfM discussion paper #2022-13; IZA discussion paper #16603
Abstract: The housing market is subject to search frictions in buying and selling houses. This paper documents the role of inflows (new listings) and outflows (sales) in explaining the volatility and co-movement of housing-market variables. An 'ins versus outs' decomposition shows that both inflows and outflows are quantitatively important in understanding fluctuations in houses for sale. The correlations between sales, prices, new listings, and time-to-sell are shown to be stable over time, while the signs of their correlations with houses for sale are found to be time varying. A calibrated search-and-matching model with endogenous inflows and outflows and shocks to housing demand matches many of the stable correlations and predicts that correlations with houses for sale depend on the source and persistence of shocks.
Institutional Specialization, October 2023, (with Bernardo Guimaraes) - CEPR discussion paper #11880; CfM discussion paper #2017-10; SSRN paper #3852144, (earlier version entitled Political Specialization)
Abstract: This paper presents a theory of institutional specialization in which some countries uphold the rule of law while others choose extractive institutions, even when countries are ex-ante identical. The driving force of specialization is that for incumbents in each country, the first steps to the rule of law have the greatest cost. Good institutions require sharing power and rents, but in places where power is already shared broadly, each power base or branch of government underpinning institutions is individually less important and thus receives lower rents. Countries with diametrically opposed institutions have a symbiotic relationship in the world equilibrium. The transition from sail to steam-powered vessels in 19th-century trade provides suggestive evidence supporting the theory.
To Own or to Rent? The Effects of Transaction Taxes on Housing Markets, June 2023, (with Lu Han and Rachel Ngai) - CEPR discussion paper #17520; CfM discussion paper #2023-17
Abstract: Using sales and leasing data, this paper finds three novel effects of a higher property transaction tax: higher buy-to-rent transactions alongside lower buy-to-own transactions, despite both being taxed; lower sales-to-leases and price-to-rent ratios; and longer time-on-the-market. This paper explains these facts by developing a search model with entry of investors and households choosing to own or rent in the presence of credit frictions. A higher transaction tax reduces homeowners' mobility and increases demand for rental properties, which reduces the homeownership rate. The deadweight loss is large at 113% of tax revenue, with more than half of this due to distorting decisions to own or rent.
Taking Away the Punch Bowl: Monetary Policy and Financial Instability, September 2020, (earlier version entitled A Tale of Two Inflation Rates: House-Price Inflation and Monetary Policy)
Abstract: In the last decade, the problem of financial instability has grabbed the attention of economists and policymakers. This paper presents a theory of financial crises due to excessively loose monetary policy. Under political pressure to choose a monetary policy that is popular with the average person in the economy, the central bank sets low interest rates, which most of the time delivers rapid asset-price inflation and a build-up of debt, but also occasional financial crises where asset prices collapse and deleveraging occurs. Pareto-inefficient financial instability occurs because the central bank does not have access to individual-specific lump-sum taxes and transfers to sterilize the distributional consequences of changing interest rates. Consequently, removing the punch bowl is difficult because too many individuals have a vested interest in maintaining cheap credit.
The Decision to Move House and Aggregate Housing-Market Dynamics, May 2019, (with Rachel Ngai) - published in Journal of the European Economic Association, vol. 18(5), pp. 2487-2531, October 2020; Online appendix; Data and code; 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 mismatch for homeowners. The quantitative importance of the decision to move house is shown in understanding the U.S. housing-market boom during 1995-2003.
Conventional and Unconventional Monetary Policy Rules, July 2017 - published in Journal of Macroeconomics, vol. 54(A), pp. 127-147, December 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.
Guarding the Guardians, November 2015, (with Bernardo Guimaraes) - published in Economic Journal, vol. 127(606), pp. 2441-2477, November 2017; 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.
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; Code; 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.
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.
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.
Last updated: 15th November 2023