Working Papers

Abstract: At the outbreak of the recent inflation surge, the public’s attention to inflation was low but increased rapidly once inflation started to rise. Using survey inflation expectations, I quantify when and by how much the public's attention to inflation changes. I estimate an attention threshold at an inflation rate of 4%, and that attention doubles when inflation exceeds this threshold. Negative supply shocks are more than twice as inflationary in the high-attention regime, and the increase in people's attention to inflation in early 2021 accounts for about 50% of the supply-driven inflation between 2021 and 2023. I develop a general equilibrium model accounting for the attention threshold and show that shocks that are usually short lived can lead to a persistent surge in inflation if they induce an increase in people's attention. The attention threshold leads to an asymmetry in the dynamics of inflation as periods of high inflation become substantially more likely than periods of low inflation..

Abstract: Heterogeneity in households' savings behavior and financial situations significantly affects macroeconomic fluctuations and policy. Using micro data on households' financial situations and cognitive skills, we uncover a systematic relationship between these two. Cognitively-less skilled households are more likely to be hand-to-mouth and overconfident about their skills. Households that are overconfident about their skills are also likely to be overly optimistic about their future financial situations. Given these empirical insights, we develop a Heterogeneous Agent New Keynesian model with heterogeneity in cognitive skills and overconfidence. The model accounts for our empirical findings and jointly matches the average marginal propensity to consume and the average wealth level even when all wealth is liquid. Allowing for heterogeneity in cognitive skills and overconfidence has important normative and positive implications for fiscal policy: the optimal government debt level is substantially lower, and - for a given average MPC - transfers to low-income households are less stimulating.

Abstract: We propose a tractable heterogeneous firms framework to analyze how the  availability of data in modern economies affects firm investment, its responsiveness to monetary policy, and its evolution along the business cycle. In our framework, data resolves a firm's uncertainty, i.e. reduces the variance of a firm's productivity and is informative about future productivity draws. Moreover, data accumulates endogenously through a data feedback loop. We establish that data-rich firms respond more strongly to monetary policy shocks and expansionary monetary policy raises market concentration.  Moreover, the data feedback loop can induce firms that are more exposed to risk to hold higher levels of capital, which amplifies cyclical fluctuations driven by changes in aggregate uncertainty. By contrast, data that endows  firms with knowledge about their future productivities diminishes the strength of cyclical fluctuations driven by aggregate productivity shocks.

Abstract: We analyze how cognitive discounting and household heterogeneity affect the transmission of monetary policy. Under cognitive discounting, households’ expectations exhibit an underreaction to news about the aggregate economy, which is consistent with empirical evidence on household expectations. Our model simultaneously accounts for recent empirical findings of the transmission of monetary policy: (i) monetary policy affects consumption largely through indirect effects, (ii) households are unequally exposed to aggregate fluctuations and income risk is countercyclical, (ii) forward guidance is less powerful than contemporaneous monetary policy, (iv) and the economy remains stable at the zero lower bound. In contrast to demand shocks, supply shocks are amplified through both, cognitive discounting and household heterogeneity, such that inflation increases more than twice as strong as when abstracting from cognitive discounting and household heterogeneity. 


Abstract: U.S. households’ housing price expectations deviate systematically from full-information rational expectations: (i) expectations are updated on average too sluggishly; (ii) expectations initially underreact but subsequently overreact to housing price changes; and (iii) households are overly optimistic (pessimistic) about capital gains when the price-to-rent ratio is high (low). We show that weak forms of housing price growth extrapolation allow to simultaneously replicate the behavior of housing prices and these deviations from rational expectations as an equilibrium outcome. Embedding housing price growth extrapolation into a sticky price model with a lower-bound constraint on nominal interest rates, we show that lower natural rates of interest increase the volatility of housing prices and thereby the volatility of the natural rate of interest. This exacerbates the relevance of the lower bound constraint and causes Ramsey optimal inflation to increase strongly with a decline in the natural rate of interest. 

Abstract: I propose an approach to quantify attention to inflation in the data and show that the decrease in the volatility and persistence of U.S. inflation after the Great Inflation period was accompanied by a decline in the public's attention to inflation. This decline in attention has important implications (positive and normative) for monetary policy as it renders managing inflation expectations more difficult and can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. As attention declines the optimal policy response is to increase the inflation target. Accounting for the lower bound fundamentally changes the normative implications of declining attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound.