Eduardo Amaral

Can a central bank tighten monetary policy and actually see real interest rates FALL under monetary dominance?

My new research paper finds that under certain conditions, the answer is a surprising YES.

A thread on a monetary policy puzzle (1/10) #Economics #MonetaryPolicy #CentralBank

Intrigued? If you're an economist, macro-finance expert, or just fascinated by monetary puzzles, you may want to read the full paper.

It has just been published in the BIS Working Paper series.

Read it here: bis.org/publ/work1288.…

This identification problem isn't just theoretical. It has real implications for how central banks should design policy, particularly in scenarios where investment is highly vulnerable — like after financial crises, pandemics, or major trade disruptions. (9/10) #CentralBanking #FinancialMarkets

My paper proposes a new measure of the monetary policy stance that avoids this pitfall. It works by filtering the impact of the monetary shock as if capital was fixed.

From 1965 to 2023, this new measure also enhanced inflation forecasting in the United States. 📈 (8/10)

The identification puzzle creates a big problem: the classic "real interest rate gap" (r - r*) used to gauge the monetary policy stance moves in the WRONG direction.

If r falls after a hike, the gap suggests policy is easing when the central bank is actually tightening! (5
7/10) #rStar

The first case appears in textbooks (eg Woodford & Galí). The second case was revealed by Peter Rupert and Roman Ŝustek (2019). In my paper, in addition of explaining why it happens, I check its empirical relevance and suggest ways or circumventing it. Moreover, I propose a solution. (6/10)

I find that the explanation for this phenomenon lies on the expected policy-reaction function of the central bank. Whenever the endogenous component of the policy rule outweighs the contractionary exogenous shock, we have that ↓ i. If it outweighs by more than Eπ ⇒ ↓r. (5/10)

The new transmission looks like this:

↑i ⇒ ↑r ⇒ ↓↓ Investment (if it is very sensitive) ⇒ ↓↓y ⇒ ↓↓π ⇒ ↓ i ⇒ ↓r

The initial hike is overwhelmed by the fall in π expectations, reversing interest rates. The real rate ends up lower, even as inflation falls! (4/10)

But what happens when we take this standard model and introduce capital and investment? Things can get weird.

In extreme scenarios, a policy rate hike can cause such a sharp drop in demand & inflation expectations that interest rates collapse. (3/10)

The standard story of monetary policy is straightforward:

The Fed hikes rates (↑i) → real rates rise (↑r, if prices are sticky) → consumption falls (↓c) → output falls (↓y) → inflation falls (↓π).

It all works through higher real borrowing costs. (2/10)

Can a central bank tighten monetary policy and actually see real interest rates FALL under monetary dominance?

My new research paper finds that under certain conditions, the answer is a surprising YES.

A thread on a monetary policy puzzle (1/10) #Economics #MonetaryPolicy #CentralBank

Para a comunidade acadêmica de economistas, a premiação de Acemoglu, Johnson e Robinson pela Academia Sueca era apenas questão de tempo. Em artigos seminais, AJR exploraram a relação entre a expansão colonial europeia a partir do século XVI e desempenho econômico. +

Eles mencionam o paper dele como um método de solução aproximada usando Dynare. A proposta me parece ser tornar-se mais user-friendly e com acesso a outros métodos mais precisos de solução.

HANK is coming to Dynare 🎉

For Bluesky-Curious Econ Lovers - Aaron Sojourner This Quick Start guide aims to help econ lovers easily join Bluesky’s growing economics community. The Bluesky User FAQ covers generic basics, like how to start an account. This guide orients you to e...

For Bluesky-Curious Econ Lovers, a Quick Start guide to plugging into the economics community here.

I wrote it hoping to lower the costs & boost the benefits for folks to engage here.

If you think it's useful, please share it.
📉📈 #️⃣#️⃣
aaronsojourner.org/for-bluesky-...