Job Market Paper

The Perceived Sources of Unexpected Inflation with Emilio Zaratiegui

We use high-frequency asset price changes around Consumer Price Index announcements in the US to learn about market perceptions regarding the economy. We write a New Keynesian Model with incomplete information and an inflation announcement to extract the demand and supply share of unexpected inflation through observable asset price changes around the announcement. The key intuition is that, given a standard Taylor rule, if consumption expectations rise in response to a positive surprise in inflation, it implies that a positive demand shock plays an important role, whereas if consumption expectations fall in response, it highlights the significance of a negative supply shock. Empirically, we find that the response of expected future annual dividends of S&P 500 companies to a positive surprise in inflation around US CPI announcements was positive before the Covid period but turned negative post-Covid. We use these to construct high-frequency changes in expectations of future real consumption. We also find that future treasury nominal yields and forward breakeven inflation rates increase in response to a positive surprise in inflation throughout the period. Interpreting our empirical findings through the lens of the model, we find that the relative share of supply in unexpected inflation has increased by 20 percentage points post-Covid.

Working Papers

Anatomy of Banks’ IT Investments: Drivers and Implications (IMF Working Paper) with Nicola Pierri, Yannick Timmer and María Soledad Martínez Pería (R&R at Journal of Financial and Quantitative Analysis)

Using a newly compiled measure, this paper studies the determinants and implications of US banks’ Information Technology (IT) investments. Exposure to fintech competition and novel economies of scale are important drivers of the six-fold increase in IT investments observed over two decades. Further analyses point towards significant implications of banks’ IT investments for both (i) monetary policy transmission to lending and (ii) financial inclusion of low income borrowers.

Loan Covenants Meet Monetary Policy: The Distance to Violation Effect

We study the role of loan-level financial covenants in determining the investment channel of monetary policy. We find that out of all covenant-types, the minimum interest coverage covenant, which sets a minimum ratio of earnings to interest payments, interacts robustly with monetary shocks. When there is a positive monetary shock, the farther away a firm is from violating its interest coverage threshold, the more responsive it is to a monetary shock in terms of investment. This finding is robust to controlling for factors known to affect the transmission of monetary policy to firm investment. The intuition is that in an environment with agency frictions, a firm that is farther away from violating its interest coverage covenant faces a lower marginal cost and borrows more to invest in riskier projects.