Would active labor market policies help combat high U.S. unemployment?

Two years after the end of the 2007-09 recession, the unemployment rate in the United States remains above 9 percent - roughly double its pre-recession level. ; Nie and Struby analyze the cyclical and structural components of this elevated level of unemployment, active and passive labor market policies, and how the policies are utilized in the United States and 20 Organization for Economic Cooperation Development countries. ; The analysis finds that two active programs can be particularly effective: training programs that equip unemployed workers with skills that are in demand and job-search assistance that matches unemployed workers with employers. These findings - together with evidence that the U.S. labor market currently suffers from a certain amount of structural unemployment - suggest that the United States could benefit from more training programs and job-search assistance.

Inflation Expectations and Political Polarization: Evidence from the Cooperative Election Study

Using a unique, nationally representative survey from the 2022 midterm elections, we investigate the partisan divide in beliefs about inflation and monetary policy. We find that party identity is predictive of inflation forecasts even after conditioning on beliefs about both past inflation and the Federal Reserve’s long-run inflation target. Partisan forecast differences are driven by respondents who express low generalized trust in others and have a high degree of political knowledge; high-trust and low- knowledge partisans make similar forecasts all else equal. This finding is consistent with the literature in political psychology that examines the endorsement of conspiracy theories and political misinformation. We argue that the partisan divide in consumer inflation surveys is consistent with strategic responses by partisans

Essays on Information in Macroeconomics and Finance:

Thesis advisor: Ryan ChahrourExpectations formation is central to macroeconomics. Households, firms, and policymakers must form expectations not only about fundamentals, but about what other agents’ beliefs are, because others’ beliefs will determine their actions. The three essays in this dissertation examine empirically and theoretically how agents use both public and private information to form expectations. The first two essays combine a models of optimizing behavior and forecasting with data on the macroeconomy, financial prices, and macroeconomic forecasts to examine the extent to which economic agents learn about the macroeconomy from financial prices and monetary policy actions. The third essay examines theoretically how members of a committee use public and private information to form beliefs when they care both about having accurate forecasts and coordinating actions with others. All three essays emphasize that frictions in expectations formation are a salient feature of the world, and understanding the extent and importance of those frictions is important for both positive and normative questions in macroeconomics and finance. Beliefs about the future determine the willingness of financial market participants to save and invest, and theory suggests they should value more highly assets which are expected to pay higher returns during recessionary periods when consumption is otherwise low. Hence, financial prices reflect macroeconomic expectations. In the first essay, titled "Macroeconomic Disagreement in Treasury Yields," I explore how agents with idiosyncratic, private information form beliefs about both the macroeconomy and the beliefs of other agents. Using data on United States Treasury debt, the macroeconomy, and individual inflation forecasts, I estimate the precision of bond traders’ information about the macroeconomy and how much they disagree with each other. I allow for traders to learn both from private signals and from asset prices, which aggregate the beliefs of all the traders in the market. I find that bond prices are moderately informative about macroeconomic variables, but are the source of most of the information traders have about monetary policy and the beliefs of others. In contrast to studies which assume full information, risk premia are much less important than slow-adjusting interest rate expectations for explaining the behavior of long-run yields. The most important signal for bond traders appears to be the Federal Reserve’s short-run rate, which encodes information about the macroeconomy and the central bank’s intended future policy. Nevertheless, the fact that traders held disparate beliefs about the macroeconomy, and especially about the long-run inflation target of the Federal Reserve, elevated long-term yields on average. The first essay demonstrates empirically that financial market participants learn about the macroeconomy from monetary policy actions. However, it is silent on how monetary policymakers form beliefs about the macroeconomy, or how the information in monetary policy rates endogenously affects macroeconomic outcomes. In the second essay "Your Guess is as Good as Mine: Central Bank Information and Monetary Policy," I use data on private sector forecasts and forecasts from the Federal Reserve Board staff to examine the typical assumption of common information between firms and monetary policymakers. Using forecasts from a survey of professional forecasters and from the Federal Reserve Board staff, I show evidence against the typical assumption of common information between monetary policymakers and the private sector, and also that policymakers are, at best, only weakly better at forecasting than private forecasters. Based on this evidence, I augment an otherwise standard monetary policy model by relaxing the common information assumption. Instead, I assume there is idiosyncratic, private information among price-setting firms, and between firms and the central banker. Firms combine private information about aggregate conditions with the observed monetary policy rate to form expectations about fundamentals and the beliefs of rival firms. The central banker must form expectations about firms’ beliefs because those beliefs will determine inflation and overall economic activity. But as a result of their differences in information sets, firms must form expectations about other firms’ expectations, and what the central banks’ expectations of their expectations are. I examine the ability of this model to fit the data and find that the model can capture features of both firm and central bank inflation expectations, but in the absence of imperfect information among households, it is difficult to simultaneously match the forecast data and data on real activity. This result points to the sensitivity of models with dispersed information to the underlying assumptions about how central bankers will respond to exogenous shocks. The second chapter emphasized how the assumptions economists make regarding monetary policymakers’ information is critical for understanding their actions. Motivated by this example, my third chapter "Information Investment in a Coordination Game" explores theoretically how members of a committee who are uncertain about others’ beliefs decide on a binary action, and how their decision to pay close attention to public or private signals is related to their desire to accurately forecast versus coordinating their behavior with others. I show that when it is assumed that information decisions among committee members are symmetric - everyone pays the same amount of attention to the same things - there is a unique outcome of the coordination game. However, I further show that it is difficult to guarantee that committee members will all choose a symmetric allocation of information. Aside from the direct cost of acquiring better information, allocating attention to more accurate signals can harm welfare when coordination motives are dominant. In a set of numerical exercises, however, I show that it is possible for a unique equilibrium to exist, and that actions that do not have a large impact on the payoffs of committee members (such as changing the size of the committee) may nevertheless have large impacts on the accuracy of the committee’s forecasts. This suggests a possible tension between the welfare of the committee, which benefits from consensus, and the welfare of those affected by the committee’s actions, which likely depends on whether the committee takes the objectively correct action. My dissertation has important implications for both academic economists and policymakers. Understanding the sources of business cycle fluctuations and the determinants of asset prices requires grappling with the fact that people have differences in beliefs. Empirical evidence suggests that agents’ beliefs are shaped by both idiosyncratic forces and by public announcements and policy decisions, and economists’ models need to reflect these features of the world. Policy, too, is affected by the information available to policymakers, and to understand how policymakers have acted in the past and should act in the future, it is necessary to take seriously the ways their belief formation deviates from the full information rational expectations benchmark

Treasury Buybacks, the Fed\u27s Portfolio, and Local Supply

The U.S. Department of Treasury has announced plans to revive its buyback program after more than two decades. We estimate the effects of the 2000-2002 Treasury Buyback program on Treasury returns and the Federal Reserve\u27s System Open Market Account (SOMA) portfolio. The reduction in supply from the buybacks had significant effects on both the bonds purchased by the buybacks and bonds with similar remaining maturity. Changes in supply contributed about 90 basis points to price returns over the course of the program -- nearly 1/5 of the overall change in prices. At a higher frequency, prices of purchased bonds and their near substitutes tended to change on settlement dates, not auction dates. We find that the Fed\u27s holdings of individual securities were largely unaffected over the course of the buyback program. This is consistent with the Fed attempting to avoid exacerbating supply shortages in Treasury markets

Shadow Rate Models and Monetary Policy

We examine the channels and efficacy of monetary policy at the zero lower bound (ZLB) through the lens of shadow rate models. We compare estimates across models with various factor structures and different assumptions about interest rate forecasts. We confirm that calendar-based forward guidance discretely shifted the implied duration of the ZLB and that large scale asset purchases (LSAPs) primarily lowered term premia. However, we find that the real effects of monetary policy are more muted relative to prior estimates: a 1 standard deviation fall in the shadow rate causes a peak decline in the unemployment rate of 0.003-0.01%

Knowledgeable Partisans and Inflation Expectations

Using a nationally representative survey from the 2024 United States presidential election, we investigate the role knowledge plays in the difference between inflation expectations of Republicans and Democrats. Unconditionally, Republicans\u27 average inflation forecast was nearly 3\% higher than Democrats; they also reported higher inflation in the past year (3.5\%) and higher expectations in the long run (2.0\%). Conditioning on their beliefs about the future and their long-run forecasts reduces the pure partisan gap in inflation forecasts by two thirds. The gap between Democrats and Republicans is largest for partisans who are the most knowledgeable about politics. Greater numeracy appears to exacerbate the partisan gap, while greater economic knowledge mitigates it. The differential role of partisan and economic knowledge are consistent with a model where respondents\u27 survey responses balance objective forecasts with affective motives

Macroeconomic Disagreement in Treasury Yields

I estimate a term structure model of Treasury yields in which traders’ informa- tion about macroeconomic conditions is dispersed. Bond yields and inflation forecasts identify properties of traders’ information. I find that prices are moderately infor- mative about economic fundamentals, but more informative about policy and others’ beliefs. Nevertheless, beliefs about the macroeconomy are estimated to be quite het- erogeneous. Over the sample period, dispersed beliefs directly added an average of 60 basis points to ten year yields, mostly attribute to disagreement about the Federal Re- serve’s inflation target. Accounting for learning and belief heterogeneity dramatically reduces the magnitude and volatility of risk premia relative to estimates that assume full information

News Shocks under Financial Frictions: A comment on Görtz et al. (2022)

Görtz et al. (2022) estimate the effects of innovations to future total factor productivity (TFP) on financial markets. In a Bayesian vector autoregression, they identify a TFP news shock as one that explains the largest share of 40- quarter ahead forecast error variance (FEV) of TFP. Their estimated impulse responses functions show that a positive news shock significantly decreases credit market spreads and increases credit market supply. They also find that a shock that explains the maximum of the FEV of the "excess bond premium" (EBP) (Gilchrist and Zakrajsek 2012) causes similar responses. These results are consistent with an estimated DSGE model with financial frictions. We estimate the main IRFs of the study using the original data and a frequentist estimation approach. We obtain similar point estimates for the dynamic responses to TFP news and EBP max-share shocks. We also update their macroeconomic and financial time series, as some of the data has been revised substantially since their original estimate. We use the updated data to re-estimate the above-mentioned IRFs, and we find that the results are robust to this change in the data. Finally, we investigate the computational reproducibility of their DSGE results, and find that their provided code (consistent with warnings in their README file) does not execute in the most recent version of Dynare or Matlab. Using the version indicated in their replication files, we encounter issues estimating the posterior mode