Publications
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.
Here's a VoxEU summary of the paper written by Gauti Eggertsson and Lawrence Summers. NBER Working Paper no. 22299.
Policy Citations:
Jason Furman, Chairman of the Council of Economic Advisers (October 5, 2016, August 2, 2016)
Simon Potter, Executive Vice-President of the Federal Reserve Bank of New York (September 30, 2016)
Vítor Constâncio, Vice-President of the European Central Bank (April 13, 2016)
Press Coverage:
Washington Post (July 7, 2016)
Paul Krugman's Blog (June 20, 2016)
Economist's View (June 7, 2016)
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.
Here's a VoxEU summary of the paper written by Gauti Eggertsson and Lawrence Summers. NBER Working Paper no. 22299.
Policy Citations:
Jason Furman, Chairman of the Council of Economic Advisers (October 5, 2016, August 2, 2016)
Simon Potter, Executive Vice-President of the Federal Reserve Bank of New York (September 30, 2016)
Vítor Constâncio, Vice-President of the European Central Bank (April 13, 2016)
Press Coverage:
Washington Post (July 7, 2016)
Paul Krugman's Blog (June 20, 2016)
Economist's View (June 7, 2016)