Research
Working Papers
Indirect Inference: A Local Projection Approach (with Russell W. Cooper)
Abstract
This paper develops a new method for estimating the structural parameters of any DSGE model. The method uses Local Projection (LP) coefficients in an indirect inference exercise. Monte Carlo analysis is employed to examine its small sample performance and to compare it to the traditional approach in macroeconomics that relies on the use of VARs. Our results reveal that our approach produces consistent and computationally efficient estimates and that it outperforms the VAR approach in capturing the shape of true IRFs. This methodology is then used to re-estimate the Smets and Wouters (2007) model in an attempt to reconcile it with the new evidence on how the economy responds to aggregate shocks. We show that: (i) our parameter estimates are similar to those obtained under full information, (ii) the small differences in parameterizations are not enough to capture some of the effects of fiscal and monetary policy shocks, and (iii) the model does a good job on capturing the responses to technology shocks even if we do not target them.
Presented @ BSE (Summer Forum 2023), ESCP Business School (T2M 2023), ADEIT U Valencia (SAEe 2022), ECB (RCC5 Brownbag Seminar), EUI (Macro WG & Cooper WG)
The aggregate and distributional implications of credit shocks on housing and rental markets (with Andrew Hannon & Gonzalo Paz-Pardo)
Abstract
We propose a joint model of the aggregate housing and rental markets in which both house prices and rents are determined endogenously. Households can choose their housing tenure status (renters, homeowners, or landlords) depending on their age, wealth, and income. We use our model to study the introduction in Ireland in 2015 of macroprudential policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratios of newly originated mortgages. The introduction of stringent LTV and LTI ratios mitigates house price growth, but increases rents and reduces homeownership rates. As a result, middle-income households are negatively affected.
Presented @ U Salamanca (SAEe 2023), Bank of England (FSSR Brownbag Seminar), LBS (TADC Economics 2023), EUI (Macro WG, Fourth Year Forum & Cooper WG), Sveriges Riksbank$^{\star}$, Catolica Lisbon SBE (Lisbon Macro Workshop 2023)$^{\star}$, Bank of Ireland$^{\star}$, ECB (DG Monetary Policy, DG Research & RTF on Heterogeneity)$^{\star}$, TSE (ECHOPPE 2023)$^{\star}$, PSE$^{\star}$, Norges Bank$^{\star}$, BI Norwegian Business School$^{\star}$, St. Gallen$^{\star}$
Work in Progress
Monetary Policy Transmission in the UK Mortgage Market (with Stephen Millard & Alexandra Varadi)
Abstract
Central Banks (CBs) all around the world have risen interest rates to cope with inflation. This policy has put pressure on mortgagors through increasing mortgage rates. This paper analyzes the effect of such policy response in the context of the UK. Unlike other countries, the UK is characterized by hybrid rate mortgages (HRM) that start with a fix rate and then automatically switch to an adjustable one. We embed such contractual arrangement into a New-Keynesian model with long term mortgage debt and study the effects of temporary and permanent changes in the policy rate. We find that the pass-through to mortgage rates is weaker under HRM than in fully fixed (FRM) or adjustable rate (ARM) economies. Nonetheless, the aggregate response to a temporary shock is similar under the three economies. When the shock is persistent, the mortgage payment channel is quantitatively more relevant and we find differences between the three economies considered: FRM, ARM and HRM.
Dormant Projects
Average Inflation Forecast Targeting (with Sebastian Schmidt)
Durables and Portfolio Choice: Response to Aggregate Shocks (with Russell W. Cooper & Sebastian Rast)
$^\star$ Presentation given by a co-author.