Current Working Papers

Revisiting the Interest Rate Effects of Federal Debt

Joint with Michael Plante and Sarah Zubairy

New: April 17, 2025

Abstract: This paper revisits the relationship between federal debt and interest rates. A common approach in the literature is to regress an expected interest rate on a projection of federal debt. We show that issues related to nonstationarity have become more pronounced over the last 20 years, raising significant concern about the reliability of estimates from this model. We argue that estimating the model in first differences rather than in levels addresses these concerns. Our preferred specification indicates that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by 3 basis points. About three-quarters of the increase in interest rates is driven by term premium rather than expected short-term real rates.

The Postpandemic U.S. Immigration Surge: New Facts and Inflationary Implications

Joint with Anton Cheremukhin, Sewon Hur, Ronald Mau, Karel Mertens, and Xiaoqing Zhou

New: March 14, 2025

Abstract: The U.S. experienced an extraordinary postpandemic surge in unauthorized immigration. A popular view is that an increase in immigration is a positive supply shock that reduces inflation. Using a standard model, we first demonstrate that the popular view does not account for important demand-side effects that dampen, and possibly overturn, the decline in inflation. We then examine the inflationary implications of the postpandemic immigration surge. To inform the strength of the demand-side effects, we examine the characteristics of postpandemic immigrants. We find that they tend to be hand-to-mouth consumers and low-skilled workers that complement the existing workforce. Building these features into a medium-scale model, we find robust evidence that the postpandemic immigration surge had little effect on inflation.

Geopolitical Oil Price Risk and Economic Fluctuations

Joint with Lutz Kilian and Michael Plante

[Online Appendix, VOXeu]

Revised: May 5, 2025

Abstract: This paper studies the general equilibrium effects of time-varying geopolitical risk in the oil market by simultaneously modeling downside risk from disasters, oil storage, and the endogenous determination of oil price and macroeconomic uncertainty in the global economy. Notwithstanding the attention geopolitical events in oil markets have attracted, we find that geopolitical oil price risk is not a major driver of global macroeconomic fluctuations. Even when allowing for the possibility of an unprecedented 20% drop in global oil production, it takes a large increase in the probability of such a disaster to cause a sizable recessionary impact.

Estimating Macroeconomic News and Surprise Shocks

Joint with Lutz Kilian and Michael Plante

[Online Appendix]

Revised: January 2, 2025

Abstract: The importance of understanding the economic effects of news and surprise shocks to TFP is widely recognized in the literature. A common VAR approach is to identify responses to TFP news shocks by maximizing the variance share of TFP over a long horizon. Under suitable conditions, this approach also implies an estimate of the surprise shock. We find that these TFP max share estimators tend to be strongly biased when applied to data generated from DSGE models with shock processes that match the TFP moments in the data, both in the presence of TFP measurement error and in its absence. Incorporating a measure of TFP news into the VAR model and adapting the identification strategy substantially reduces the bias and RMSE of the impulse response estimates, even when there is sizable measurement error in the news variable. When applying this method to the data, we find that news shocks are slower to diffuse to TFP and have a smaller effect on real activity than implied by the TFP max share method.

COVID-19: A View from the Labor Market

Joint with Joshua Bernstein and Nathaniel Throckmorton

Abstract: This paper examines the response of the U.S. labor market to a large and persistent job separation rate shock, motivated by the ongoing economic effects of the COVID-19 pandemic. We use nonlinear methods to analytically and numerically characterize the responses of vacancy creation and unemployment. Vacancies decline in response to the shock when firms expect persistent job destruction and the number of unemployed searching for work is low. Quantitatively, under our baseline forecast the unemployment rate peaks at 19.7%, 2 months after the shock, and takes 1 year to return to 5%. Relative to a scenario without the shock, unemployment uncertainty rises by a factor of 3. Nonlinear methods are crucial. In the linear economy, the unemployment rate "only'' rises to 9.2%, vacancies increase, and uncertainty is unaffected. In both cases, the severity of the COVID-19 shock depends on the separation rate persistence. 

Income Inequality and Current Account Imbalances

Joint with Michael Kumhof, Claire Lebarz, Romain Ranciere, and Nathaniel Throckmorton

Abstract: Econometric evidence shows that when higher income inequality and financial liberalization are added to a set of conventional explanatory variables, they predict significantly larger current account deficits in a cross-section of advanced economies. To study this mechanism, we develop a DSGE model where investors' income share increases at the expense of workers, and where workers respond by obtaining loans from domestic and foreign investors. This supports aggregate demand but generates current account deficits, especially if domestic financial markets are simultaneously liberalized. In emerging markets, because domestic workers cannot borrow, investors deploy their surplus funds abroad, leading to current account surpluses.