We study the implications of uncertainty about a central bank’s preference for inflation stability for monetary policy design. A hawkish reputation, defined as a reputation for placing large weight to inflation stabilization, reduces stabilization costs by dampening the pass-through of shocks to short-run inflation expectations. Because the private sector learns from the bank’s policy actions, the optimal response to cost-push shocks is more aggressive than that of a myopic policymaker: the bank internalizes the value of its reputation. Furthermore, the bank treats reputation as an asset: it invests in it when perceived as dovish, and spends it when perceived as hawkish. Using cross-sectional variation in U.S. private forecasts, we find evidence consistent with these mechanisms. Quantitatively, welfare gains from the optimal policy are larger during the Great Moderation than during the Great Inflation, and delegating policy to a conservative but myopic central banker, as in Rogoff (1985), closely approximates the optimal policy.

[SSRN]

We analyze optimal interventions in networked economies with stochastic linkages. Linear taxes dominate quotas whenever shocks are symmetric because the ensuing equilibrium adjusts toward the first-best allocation, thereby correcting policy mistakes—vice versa for antisymmetric shocks. Flexible interventions can implement the first-best allocation for each realized network whenever shocks are symmetric. Our results offer optimality foundations for price interventions when shocks have a large common component, and for quantity instruments when policymakers are concerned about the correlation structure across links. 

[SSRN]

We study the identification of non-linear causal effects of macroeconomic shocks using local projections augmented by a non-linear function of the shock of interest. Our analysis focuses on two types of non-linearities: by size and sign of the shock. We characterize the estimand of our non-linear local projections. Our main result is that the local projections identify pure sign non-linearities when they include an even non-linear function of the shock and vice-versa for size non-linearities and odd functions. We illustrate our method

with an application to oil supply news shocks, documenting evidence in favor of size (but not sign) non-linearities.

[SSRN] [Code]

We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.

[SSRN] [NBER WP31763]

This study explores the consequences of dollarizing an economy with an initial dollar shortage. We show that the resulting transitional dynamics are tantamount to that of a“sudden stop”: consumption of tradable goods fall, the real exchange rate depreciates abruptly by a discrete drop in domestic prices and wages followed by a gradual appreciation from positive inflation. With nominal rigidities the economy first falls into a recession. This is true even if all prices and wages are allowed to adjust flexibly on impact. The subsequent recovery in activity always “overshoots” the steady state: the non-tradable sector transitions from the initial recession to a boom, then asymptotes to its steady state.

[SSRN] [NBER WP31296]