Working Papers

Ambiguity, Nominal Bond Yields, and Real Bond Yields,2017

Abstract: We show that the term structure of ambiguity for inflation is upward sloping before the late 90s, and downward sloping afterwards. In contrast, the term structure of ambiguity for real output growth is always downward sloping. Motivated by this evidence, we develop a model in which ambiguity about inflation and growth explain this phenomenon. Combined with the fact that inflation is bad news for future growth before the late 90s, and good news afterwards, the model implies upward sloping nominal and real bond yields in both subperiods. The model is also consistent with the recent empirical findings on the term structure of equity returns.

“Learning from Monetary Shocks and Asset Returns” (joint with Simon Gilchrist), November 2015

Abstract: In an otherwise standard New Keynesian model, we assume that the monetary authority has more information about TFP growth than the private sector. Consequently, agents in the private sector cannot fully distinguish monetary shocks from changes in TFP growth rates when the monetary authority sets interest rate according to a Taylor rule. In this environment, agents update their beliefs using a Kalman Filter. Following an expansionary monetary policy shock, agents expect a higher TFP growth today; this causes stock price, output, and labor to rise simultaneously. Mean reverting TFP growth expectation implies lower future growth expectation, which lower nominal and real bond yields and increase inflation. A calibrated version of the model does well at matching the empirical reactions of stock and bond markets to monetary shocks. Monetary shocks work like noise shocks and generate business cycle comovements among key macro variables.


Confidence, Bond Risks, and Equity Returns,2016, Accepted at Journal of Financial Economics

Abstract: We show that investor confidence (size of ambiguity) about future consumption growth is driven by past consumption growth and inflation. The impact of inflation on confidence has moved considerably over time and switched on average from negative to positive in 1997. Motivated by this evidence, we develop and calibrate a model in which the confidence process has discrete regime shifts, and find that the time-varying impacts of inflation on confidence enables the model to match the bond risks over different subperiods. The model can also account for stock and bond return predictability, correlation between price-dividend ratios and inflation, and other moments.

Work in Progress

“Confidence, Asset Returns, and Monetary Policy in a New Keynesian Model”