Working Papers
The Market for Inflation Risk(with Saleem Bahaj, Robert Czech and Ricardo Reis), June 2023
Bank of England Staff Working Paper No. 1,028
This paper uses transaction-level data on the universe of traded UK inflation swaps to characterize who buys and sells inflation risk, when, and with what price elasticity. This provides measures of expected inflation cleaned from liquidity frictions. We first show that this market is segmented: pensions funds trade at long horizons while hedge funds trade at short horizons, with dealer banks as their counterparties in both markets. This segmentation suggests three identification strategies — sign restrictions, granular instrumental variables, and heteroskedasticity — for the demand and supply functions of each investor type. Across the three strategies, we find that (i) prices absorb new information within three days; (ii) the supply of long-horizon inflation protection is very elastic; and (iii) short-horizon price movements are unreliable measures of expected inflation as they primarily reflect liquidity shocks. Our counterfactual measure of long-horizon expected inflation in the absence of these shocks suggests that the risk of a deflation trap during the pandemic and of a persistent rise in inflation following the energy shocks were overstated, while since Autumn of 2022, expected inflation has been lower and falling more rapidly than conventional measures.
Presentations: Bank of England 2023, Qatar Centre for Global Banking and Finance Annual Conference 2023, 54th Annual Conference of the Money, Macro and Finance Society, 3rd Sailing the Macro Workshop
Work in Progress
Inflation Inequality in General Equilibrium
Other Work (pre-ph.d.)
Bounded Rationality in Rules of Price Adjustment and the Phillips CurveApril 2018Awarded the Kaneda Prize for a Young Outstanding Economist at the XVII Carroll Round, Georgetown University Awarded 1st Place at the 2018 New Economic Talent Competition, CERGE-EIThis paper presents a model of endogenous bias in rules of price adjustment that allows one to analyse the behaviour of inflation and output continuously throughout the entire spectrum of rationality, from one end to the other. Specifically, it proposes an alternative microfoundation for both the New Keynesian sticky-price and the sticky-information Phillips Curve by considering a possibility where price setters are constrained by the length of the time horizon over which they can form rational expectations, and they use the growth of past prices at the rate of the central bank’s inflation target as a heuristic alternative in place of their own expectations beyond this horizon. Three interesting results emerge. Firstly, how price setters form inflation expectations and whether these expectations are accurate or heterogeneous do not matter when they are able to gather information or change prices more frequently. Secondly, should policymakers expect private agents to similarly adopt the inflation target as a nominal anchor for their own expectations, then even the choice of this numerical target could prove to be pivotal to output stabilization. Thirdly, larger degrees of bounded rationality increase the persistence of inflation, and, under sticky-information, raise the possibility of discontinuous jumps and oscillatory dynamics of inflation and real output.Presentations: Georgetown University 2018, CERGE-EI 2018
Bounded Rationality in Rules of Price Adjustment and the Phillips CurveApril 2018Awarded the Kaneda Prize for a Young Outstanding Economist at the XVII Carroll Round, Georgetown University Awarded 1st Place at the 2018 New Economic Talent Competition, CERGE-EIThis paper presents a model of endogenous bias in rules of price adjustment that allows one to analyse the behaviour of inflation and output continuously throughout the entire spectrum of rationality, from one end to the other. Specifically, it proposes an alternative microfoundation for both the New Keynesian sticky-price and the sticky-information Phillips Curve by considering a possibility where price setters are constrained by the length of the time horizon over which they can form rational expectations, and they use the growth of past prices at the rate of the central bank’s inflation target as a heuristic alternative in place of their own expectations beyond this horizon. Three interesting results emerge. Firstly, how price setters form inflation expectations and whether these expectations are accurate or heterogeneous do not matter when they are able to gather information or change prices more frequently. Secondly, should policymakers expect private agents to similarly adopt the inflation target as a nominal anchor for their own expectations, then even the choice of this numerical target could prove to be pivotal to output stabilization. Thirdly, larger degrees of bounded rationality increase the persistence of inflation, and, under sticky-information, raise the possibility of discontinuous jumps and oscillatory dynamics of inflation and real output.Presentations: Georgetown University 2018, CERGE-EI 2018