Publications
Longer-run economic consequences of pandemics (with Òscar Jordà and Alan M. Taylor)
The Review of Economics and Statistics, Forthcoming
February 2021
What are the medium- to long-term effects of pandemics? How do they differ from other economic disasters? We study major pandemics using the rates of return on assets stretching back to the 14th century. Significant macroeconomic after-effects of pandemics persist for decades, with real rates of return substantially depressed, in stark contrast to what happens after wars. Our findings are consistent with the neoclassical growth model: capital is destroyed in wars, but not in pandemics; pandemics instead may induce relative labor scarcity and/or a shift to greater precautionary savings.
Link to the journal
Available as FRBSF WP 2020-09, CEPR DP 14543. NBER WP 26934
Preprint: Covid Economics Issue 1, 3 April 2020
Summary: VoxEu Column, IMF's F&D
Media Coverage: Axios, Bloomberg, Bloomberg II, Barrons, The Economist, The Economist II, FT, Reuters, WSJ, WSJ Pro, Livemint I, Livemint II, The Telegraph
Policy citations (Selected): Isabel Schnabel (ECB), Olli Rehn (Bank of Finland), Silvana Tenreyro (Bank of England), Michael Saunders (Bank of England), ECB Strategy Review Papers 269, 278 (Sep 2021)
Output Hysteresis and Optimal Monetary Policy (with Vaishali Garga)
Journal of Monetary Economics, Vol 117, pp. 871–886
January 2021
Abstract: We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing TFP growth and generating a permanent loss in output. The origin of output hysteresis is contingent on the monetary policy rule. When the nominal interest rate is constrained at the zero lower bound, a central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. Estimated structural impulse response functions for key variables align with predictions of the model. A quantitative model provides evidence of significant output hysteresis resulting from endogenous growth over the Great Recession.
Online Appendix
Replication Files
Boston Fed WP 19-19, Link to the journal
Policy Citations: Tobias Adrian (IMF), Michael Saunders (Bank of England), Claudio Borio (BIS), ECB Strategy Review Papers 267, 268, 269, 275, 278, 279 (Sep 2021), Reserve Bank of India
Log-linear Approximation versus an Exact Solution at the ZLB in the New Keynesian Model (with Gauti Eggertsson)
Journal of Economic Dynamics and Control, Vol 105, pp. 21-43
August 2019
Abstract: How accurate is a log-linear approximation of the New Keynesian model when the nominal interest rate is bounded by zero? This paper compares the solution of the exact non-linear model to the log-linear approximation. It finds that the difference is modest. This applies even for extreme events in numerical experiments that replicate the U.S. Great Depression. The exact non-linear model makes the same predictions as the log-linear approximation for key policy questions such as the size and sign of government spending and tax multipliers. It also replicates well known paradoxes like the paradox of toil and the paradox of price flexibility. The paper also reconciles different findings reported in the literature using Calvo versus Rotemberg pricing.
NBER Working Paper no. 22784, Link to the journal
The Effect of Foreign Shocks on the Indian Economy (with Aeimit Lakdawala)
India Policy Forum 2019
July 2019
The Indian economy has been increasingly exposed to external shocks with growing financial and trade integration. We examine the effects of four key international shocks: shocks to US monetary policy, oil supply, global economic policy uncertainty, and geopolitical risk. Using the external instruments strategy with local projections (LPIVs) methods and structural vector auto regressions (SVARIVs), we document the dynamic causal effects of these shocks on Indian macro and financial variables. We find these foreign shocks significantly affect the stock market, USD/INR exchange rate and foreign exchange reserves. The magnitude of effects on industrial production is consistent with the effects of world industrial production as well as the comparable benchmark of BRICS nations’ industrial production. Oil supply shocks and economic policy un certainty shocks have largest effects on industrial production while increased global geopolitical risk leads to an increase in foreign reserves held by the government. Combined, these shocks explain about 15% to 35% of the variation in inflation, output and financial variables at two to four year horizons. These findings shed new light on the quantitative magnitudes of effects of foreign shocks to the Indian macroeconomy
A Contagious Malady? Open Economy Dimensions of Secular Stagnation (with Gauti B. Eggertsson, Neil R. Mehrotra, and Lawrence H. Summers)
IMF Economic Review, Vol. 64(4), pp. 581-634
December 2016
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neo-mercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
NBER Working Paper no. 22299, Link to the Journal. Vox Summary: Eggertsson and Summers.
Policy Citations: Vítor Constâncio (ECB), Jason Furman (CEA: One, Two), Simon Potter (FRBNY)
Media Coverage: Economist's View, Paul Krugman's Blog,
Washington Post
Longer-run economic consequences of pandemics (with Òscar Jordà and Alan M. Taylor)
The Review of Economics and Statistics, Forthcoming
February 2021
What are the medium- to long-term effects of pandemics? How do they differ from other economic disasters? We study major pandemics using the rates of return on assets stretching back to the 14th century. Significant macroeconomic after-effects of pandemics persist for decades, with real rates of return substantially depressed, in stark contrast to what happens after wars. Our findings are consistent with the neoclassical growth model: capital is destroyed in wars, but not in pandemics; pandemics instead may induce relative labor scarcity and/or a shift to greater precautionary savings.
Link to the journal
Available as FRBSF WP 2020-09, CEPR DP 14543. NBER WP 26934
Preprint: Covid Economics Issue 1, 3 April 2020
Summary: VoxEu Column, IMF's F&D
Media Coverage: Axios, Bloomberg, Bloomberg II, Barrons, The Economist, The Economist II, FT, Reuters, WSJ, WSJ Pro, Livemint I, Livemint II, The Telegraph
Policy citations (Selected): Isabel Schnabel (ECB), Olli Rehn (Bank of Finland), Silvana Tenreyro (Bank of England), Michael Saunders (Bank of England), ECB Strategy Review Papers 269, 278 (Sep 2021)
Output Hysteresis and Optimal Monetary Policy (with Vaishali Garga)
Journal of Monetary Economics, Vol 117, pp. 871–886
January 2021
Abstract: We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing TFP growth and generating a permanent loss in output. The origin of output hysteresis is contingent on the monetary policy rule. When the nominal interest rate is constrained at the zero lower bound, a central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. Estimated structural impulse response functions for key variables align with predictions of the model. A quantitative model provides evidence of significant output hysteresis resulting from endogenous growth over the Great Recession.
Online Appendix
Replication Files
Boston Fed WP 19-19, Link to the journal
Policy Citations: Tobias Adrian (IMF), Michael Saunders (Bank of England), Claudio Borio (BIS), ECB Strategy Review Papers 267, 268, 269, 275, 278, 279 (Sep 2021), Reserve Bank of India
Log-linear Approximation versus an Exact Solution at the ZLB in the New Keynesian Model (with Gauti Eggertsson)
Journal of Economic Dynamics and Control, Vol 105, pp. 21-43
August 2019
Abstract: How accurate is a log-linear approximation of the New Keynesian model when the nominal interest rate is bounded by zero? This paper compares the solution of the exact non-linear model to the log-linear approximation. It finds that the difference is modest. This applies even for extreme events in numerical experiments that replicate the U.S. Great Depression. The exact non-linear model makes the same predictions as the log-linear approximation for key policy questions such as the size and sign of government spending and tax multipliers. It also replicates well known paradoxes like the paradox of toil and the paradox of price flexibility. The paper also reconciles different findings reported in the literature using Calvo versus Rotemberg pricing.
NBER Working Paper no. 22784, Link to the journal
The Effect of Foreign Shocks on the Indian Economy (with Aeimit Lakdawala)
India Policy Forum 2019
July 2019
The Indian economy has been increasingly exposed to external shocks with growing financial and trade integration. We examine the effects of four key international shocks: shocks to US monetary policy, oil supply, global economic policy uncertainty, and geopolitical risk. Using the external instruments strategy with local projections (LPIVs) methods and structural vector auto regressions (SVARIVs), we document the dynamic causal effects of these shocks on Indian macro and financial variables. We find these foreign shocks significantly affect the stock market, USD/INR exchange rate and foreign exchange reserves. The magnitude of effects on industrial production is consistent with the effects of world industrial production as well as the comparable benchmark of BRICS nations’ industrial production. Oil supply shocks and economic policy un certainty shocks have largest effects on industrial production while increased global geopolitical risk leads to an increase in foreign reserves held by the government. Combined, these shocks explain about 15% to 35% of the variation in inflation, output and financial variables at two to four year horizons. These findings shed new light on the quantitative magnitudes of effects of foreign shocks to the Indian macroeconomy
A Contagious Malady? Open Economy Dimensions of Secular Stagnation (with Gauti B. Eggertsson, Neil R. Mehrotra, and Lawrence H. Summers)
IMF Economic Review, Vol. 64(4), pp. 581-634
December 2016
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neo-mercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
NBER Working Paper no. 22299, Link to the Journal. Vox Summary: Eggertsson and Summers.
Policy Citations: Vítor Constâncio (ECB), Jason Furman (CEA: One, Two), Simon Potter (FRBNY)
Media Coverage: Economist's View, Paul Krugman's Blog,
Washington Post