Current Working Papers

Revisiting the Interest Rate Effects of Federal Debt

Joint with Michael Plante and Sarah Zubairy

New: July 5, 2025

Abstract: This paper revisits the relationship between federal debt and interest rates, which is a key input for assessments of fiscal sustainability. Estimating this relationship is challenging due to confounding effects from business cycle dynamics and changes in monetary policy. A common approach is to regress long-term forward interest rates on long-term projections of federal debt. We show that issues regarding nonstationarity have become far more pronounced over the last 20 years, significantly biasing the recent estimates based on this methodology. Estimating the model in first differences addresses these concerns. We find that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by about 3 basis points, which is statistically and economically significant and highly robust. Roughly three-quarters of the increase in interest rates reflects term premia 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

Revised: September 26, 2025

Abstract: The U.S. experienced an extraordinary surge in immigration from 2021 to 2024, which triggered widespread discussions about its macroeconomic impact, particularly on inflation. To determine the impact of the immigration surge, we first document the salient features of these new immigrants: they are primarily low-skilled relative to the existing workforce and more likely to be hand-to-mouth consumers. We then incorporate these features into a heterogeneous agent model with capital-skill complementarity. We find that the supply- and demand-side effects of the immigration surge roughly cancel out, causing a negligible response of inflation.

Geopolitical Oil Price Risk and Economic Fluctuations

Joint with Lutz Kilian and Michael Plante

[Online Appendix, VOXeu, Dallas Fed Economics Blog]

Revised: September 17, 2025

Abstract: Market participants and policymakers are concerned about major oil production shortfalls driven by geopolitical events. Even when such events never materialize, unanticipated increases in the probability of a production shortfall may generate a surge in the price of oil and oil price uncertainty. We provide the first systematic account of the quantitative importance of time-varying geopolitical risk to oil production for the global economy. We show that a 20 percentage point increase in the probability of a 5% shortfall in oil production causes a 0.12% reduction in global output. When considering a 20% shortfall, the drop in output quadruples.

Estimating Macroeconomic News and Surprise Shocks

Joint with Lutz Kilian and Michael Plante

[Online Appendix]

Revised: June 12, 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. 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 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.