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Keywords Cash; Currency suppression; Monetary policy; Demonetization Abstract We quantify the welfare effects of cash suppression policies within a general equilibrium model where cash reduces transactions costs and aids tax evasion in underground markets. In the model, currency suppression increases transactions costs and raises effective tax rates, but shifts resources out of costly underground markets and relaxes the government budget. When coupled with a reduction in distortionary taxes on consumption or factor inputs to ensure budget neutrality, cash suppression policies increase welfare in our baseline representative agent model. In a model with individual heterogeneity in cash use, suppression increases welfare for all, but by less for cash-intensive users. Author Affiliation: (a) Claremont McKenna College, United States of America (b) University of Georgia, United States of America (c) Colby College, United States of America * Corresponding author. Article History: Received 10 July 2020; Revised 25 May 2021; Accepted 25 May 2021 (footnote)[white star] We are grateful to Eric Sims and Julie Smith for helpful comments and seminar participants at the Banco Central del Uruguay, Bates College, Bowdoin College, Colgate University, dECON-Facultad de Ciencias Sociales, UDELAR, University of Kentucky, Xavier University and participants at the 2018 Jornadas Anuales de Economía del Banco Central del Uruguay and the 2019 Midwest Macroeconomics Conference. Lastrapes acknowledges financial support from the University of Georgia's Bonbright Center for the Study of Regulation while working on this paper. The usual disclaimer applies. Byline: Julio Garín [jgarin@cmc.edu] (a), William D. Lastrapes [last@uga.edu] (b,*), Robert Lester [rblester@colby.edu] (c)

Keywords IEAs; Public goods; Stable coalitions; Climate change; Transfers Abstract A longstanding result from decades of research on the provision of global public goods, is that stable coalitions of cooperating countries are small when the benefits to cooperating are large. This 'paradox' of cooperation is seemingly overcome in a recent paper 'The Strategic Dimension of Financing Global Public Goods', by Kornek and Edenhofer (2020). The authors propose a global-public goods game in which countries finance a compensation fund that can balance abatement costs among members. The fund is based on financial transfers, and in the often-explored case of linear benefits and quadratic costs, the proposed institution is credited as being able to support a stable grand coalition. However, when looking carefully at the model, the promising result relies on assumptions and features of an international institution that are not credible because they restrict members' rights to opt out. The institution's success relies on countries being required to transfer funds in response to below-average abatement levels. In this short paper we show that when countries have the outside option to renege on the terms of the agreement, no money would be transferred and the institution proposed by Kornek and Edenhofer (2020) reverts to the non-cooperative outcome. Author Affiliation: (a) Department of Economics, Appalachian State University, Boone NC 28608, United States of America (b) Department of Economics, University of Wisconsin-Milwaukee, PO Box 413, Milwaukee, WI, 53021, United States of America * Corresponding author. Article History: Received 27 October 2021; Revised 22 November 2022; Accepted 25 January 2023 Byline: David M. McEvoy [mcevoydm@appstate.edu] (a), Matthew McGinty [mmcginty@uwm.edu] (b,*)

Keywords Risk-taking channel; Optimal monetary policy; Inertial policy rate Abstract Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent). Author Affiliation: (a) Swiss National Bank, Switzerland (b) European Central Bank, Germany * Corresponding author. Article History: Received 8 August 2021; Revised 11 October 2022; Accepted 13 October 2022 (footnote)[white star] The views, opinions, findings, and conclusions or recommendations expressed in this paper are strictly those of the authors. They do not necessarily reflect the views of the Swiss National Bank (SNB) or the European Central Bank (ECB). The SNB and the ECB take no responsibility for any errors or omissions in, or for the correctness of, the information contained in this paper. We thank Pierpaolo Benigno, Harris Dellas, Beatriz Gonzalez, Thomas Lejeune, Galo Nuño, Evi Pappa, Federico Ravenna, Tiziano Ropele, Alexander Wolman and participants in the 2022 SNB research conference, a Bank of Spain seminar, the 23rd Central Bank Macro Modeling Workshop and the 2020 ESCB research cluster 1 conference for their comments. Byline: Angela Abbate [Angela.Abbate@snb.ch] (a), Dominik Thaler [Dominik.Thaler@eui.eu] (b,*)

Keywords Algorithms; Collusion; Human--computer interaction; Laboratory experiments Abstract This paper investigates pricing in laboratory markets when human players interact with an algorithm. We compare the degree of competition when exclusively humans interact to the case of one firm delegating its decisions to an algorithm, an n-player generalization of tit-for-tat. We further vary whether participants know about the presence of the algorithm. When one of three firms in a market is an algorithm, we observe significantly higher prices compared to human-only markets. Firms employing an algorithm earn significantly less profit than their rivals. (Un)certainty about the actual presence of an algorithm does not significantly affect collusion, although humans do seem to perceive algorithms as more disruptive. Author Affiliation: (a) Düsseldorf Institute for Competition Economics (DICE), Germany (b) Max Planck Institute for Research on Collective Goods, Bonn, Germany * Correspondence to: Düsseldorf Institute for Competition Economics, Heinrich Heine University Düsseldorf, 40225 Düsseldorf, Germany. Article History: Received 18 March 2022; Revised 28 October 2022; Accepted 11 November 2022 (footnote)[white star] Acknowledgements We are grateful to the editor, David Levine, an associate editor, and two referees for helpful comments. We further thank Christoph Engel, Bernhard Ganglmair, Joe Harrington, Timo Klein, Marcel Schubert, Frederike Zufall, as well as seminar participants at ALEA 2021, Bayreuth University, CLEEN Workshop 2021, Competition and Regulation Day Mannheim 2020, Crossroads of Law and Economics Workshop Rotterdam 2022, DICE Winter School 2020, EARIE 2021, IMPRS Uncertainty Thesis Workshop 2019, MPI Bonn Lab Meeting, and Third Open Antitrust Doctoral Seminar 2019 for useful suggestions that improved the paper. (footnote)1 Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany. Byline: Hans-Theo Normann [normann@dice.hhu.de] (a,b,*), Martin Sternberg [sternberg@coll.mpg.de] (b,1)

Keywords Endogenous debt maturity; Endogenous default; Firm investment; Firm life cycle; Business cycle Abstract The business cycle dynamics of firms' debt maturity vary across the firm size distribution. Small and medium-sized firms have a more pro-cyclical debt maturity than large firms. This paper explores the determinants of firms' debt maturity, and the importance of firms' debt maturity for their investment and leverage dynamics. To do so, it embeds a maturity choice in a model of firm investment and financing. Firms shorten debt maturity during times when default risk premiums are high and their internal funds are scarce. This behavior is consistent with both the life cycle and business cycle dynamics of firms' debt maturity. Endogenous debt maturity helps firms to deleverage faster in response to negative shocks. Author Affiliation: Research Department, Danmarks Nationalbank, Langelinie Allé 47, 2200 Copenhagen, Denmark Article History: Received 9 December 2020; Revised 6 July 2022; Accepted 8 November 2022 (footnote)[white star] This is a substantially revised version of the first chapter of my Ph.D. dissertation at the University of Mannheim. I am grateful to the editor Evi Pappa, as well as Klaus Adam, Florin Bilbiie, Renato Faccini, Tim Maurer, Johannes Pfeifer, Federico Ravenna, Søren Hove Ravn, Filip Rozsypal, Michèle Tertilt and two anonymous referees as well as seminar participants at the University of Mannheim, the Konstanz-Marseille Workshop in Quantitative Dynamic Economics, the ECB, Danmarks Nationalbank, Universitat Autònoma de Barcelona, LMU Munich, University of Vienna, Università di Napoli Federico II, University of Konstanz, the Bank of Lithuania, the University of Copenhagen and the EEA for useful suggestions that greatly improved the paper. This paper represents solely the view of the author and does not in any way reflect the opinions of Danmarks Nationalbank. Byline: Johannes Poeschl [jpo@nationalbanken.dk]

Keywords Government spending effects; Fiscal multipliers; Regime-switching policy; Monetary and fiscal policy interaction; Nonlinear new keynesian models Abstract Money financing returns to policy debate as governments around the world adopted massive fiscal measures during the pandemic. Using a fully nonlinear New Keynesian model with endogenous policy regime switching, we show that a moderate inflation-driven switching probability to a debt-financing regime reduces money-financed spending multipliers. When interacted with high government debt, money-financed spending multipliers fall below one, similar to the size of debt-financed spending multipliers. This result holds at the zero lower bound, with long-term government debt, and under a wide range of key parameter values. Policy regime uncertainty, on the other hand, has little effect on debt-financed spending multipliers. Author Affiliation: (a) Department of Economics, Grinnell College, United States of America (b) Department of Economics, Oklahoma State University, United States of America (c) Institute of Economics, Academia Sinica, Republic of China (Taiwan) * Corresponding author. Article History: Received 9 December 2021; Revised 4 September 2022; Accepted 26 October 2022 (footnote)[white star] This paper draws from an earlier working paper entitled 'Government Spending Effects in a Policy Constrained Environment'. We are grateful for Evi Pappa (the Editor), an anonymous associate editor, and two anonymous referees for helpful comments. We also thank Christopher Erceg, Vitor Gaspar, Cosmin Ilut, Eric Leepr, Marialuz Moreno Badia, Catherine Pattillo, David W. Savitski, Hewei Shen, Taka Tsuruga, Todd Walker, and participants of the seminar at Academia Sinica, the Fiscal Affairs Department of the IMF, Osaka University, and the UCA-CNRS-IRD-CERDI International Workshop on Policy Mix. Yang acknowledges the financial support from the National Science and Technology Council, R.O.C. (Taiwan) . Byline: Ruoyun Mao [maoruoyun@grinnell.edu] (a,*), Wenyi Shen [wenyi.shen@okstate.edu] (b), Shu-Chun S. Yang [ssyang@econ.sinica.edu.tw] (c)

Keywords Networks; Public goods; Free riding; Inequality Abstract Players allocate their budgets to links, a local public good, and a private good. A player links in order to free ride on public good provided by others. We derive sufficient conditions for the existence of a Nash equilibrium, in which large contributors link to each other, while others link to them. If linking costs are sufficiently high, poorer players may contribute more and have more central positions in the network than richer ones do. In large societies, free riding reduces inequality only in networks in which it is initially low. Otherwise, richer players free ride more, as they can afford more links. Finally, we derive the policy implications for income redistribution. Author Affiliation: (a) Departamento de Economía and Navarra Center for International Development (NCID), Edificio Amigos, Universidad de Navarra, 31009 Pamplona, Spain (b) ECARES-Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Ave. F.D. Roosevelt 42, 1050 Brussels, Belgium (c) University of Antwerp, Belgium * Corresponding author at: ECARES-Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Ave. F.D. Roosevelt 42, 1050 Brussels, Belgium. Article History: Received 8 October 2021; Revised 6 December 2022; Accepted 16 December 2022 (footnote)[white star] We would like to thank the editors, two anonymous referees, Nizar Allouch, Francis Bloch, Yann Bramoullé, Matt Elliott, Andrea Galeotti, Ben Golub, Timo Hiller, Jaromir Kovarik, Dotan Persitz, Javier Rivas, participants of the 2018 Network Science in Economics at Vanderbilt University, the Barcelona Summer Forum, the PSE Workshop on Dynamic Models of Interaction, and BiNoMa, along with seminar participants at Haifa, Tel Aviv University, University of Kent and UCLouvain Saint-Louis for their comments and suggestions. Some of the results in this paper have been previously circulated in working papers entitled 'Collaboration in Endogenous Networks' and 'The Private Provision of Public Goods in Endogenous Networks'. The usual disclaimers apply. (footnote)1 Merlino gratefully acknowledges financial support from the Centre national de la recherche scientifique (CNRS), France and the Research Foundation Flanders (FWO), Belgium through grants G026619N and G029621N. Byline: Markus Kinateder [mkinateder@unav.es] (a), Luca Paolo Merlino [luca.paolo.merlino@ulb.be] (b,c,*,1)

Keywords Credit constraints; Sticky prices; News shocks; Investment-specific technology; Comovement Abstract Recent research in DSGE and VAR models has indicated that the most important drivers of business cycles are IST shocks, not traditional TFP and other shocks. Research in VAR models has also empirically identified IST news shocks as a significant driving force behind the U.S. business cycle. However, recent New-Keynesian DSGE models have found that IST news shocks do not produce comovement of aggregate variables, with the share of the forecast error variance explained by IST news shocks being very small in a flexible-price model and essentially zero in a sticky-price model. This paper uses the Bayesian methods to estimate the parameters and shock processes to study the business cycle effects of IST news shocks in a two-sector sticky-price DSGE model with consumer durables and collateral constraints. Our variance decompositions indicate that IST news shocks are a more relevant source of uncertainty than IST non-news and other shocks. Author Affiliation: (a) Department of Economics, Fu Jen Catholic University, No. 510, Zhongzheng Rd., Xinzhuang Dist., New Taipei City 242062, Taiwan (b) Institute of Economics, Academia Sinica, 128 Academia Road, Section 2, Nankang, Taipei 11529, Taiwan * Corresponding author. Article History: Received 21 September 2020; Revised 8 December 2022; Accepted 22 December 2022 (footnote)[white star] This paper benefits from valuable comments and suggestions made by an associate editor and two anonymous reviewers. Earlier versions have benefitted from suggestions of seminar participants at NTU and TKU. Byline: Shian-Yu Liao [syliao@mail.fju.edu.tw] (a), Been-Lon Chen [bchen@econ.sinica.edu.tw] (b,*)

Keywords Reverse causality; Bayesian networks; Causal models; Non-rational expectations Abstract Reverse causality is a common attribution error that distorts the evaluation of private actions and public policies. This paper explores the implications of this error when a decision maker acts on it and therefore affects the very statistical regularities from which he draws faulty inferences. Applying the Bayesian-network approach of , I explore the equilibrium effects of a certain class of reverse-causality errors, in the context of an example with a quadratic-normal parameterization. I show that the decision context may protect the decision maker from his own reverse-causality error. That is, the cost of reverse-causality errors can be lower for everyday decision makers than for an outside observer who evaluates their choices. Author Affiliation: Tel Aviv University, Israel University College London, United Kingdom * Correspondence to: School of EconomicsTel Aviv University, Tel Aviv 69978, Israel. Article History: Received 9 March 2022; Revised 16 June 2022; Accepted 30 July 2022 (footnote)[white star] This paper cannibalizes and supersedes a previous paper titled 'A Simple Model of Monetary Policy under Phillips-Curve Causal Disagreements'. Financial support by ERC Advanced Investigator grant no. 692995 is gratefully acknowledged. I also thank Yair Antler, Tuval Danenberg, Nathan Hancart, Heidi Thysen, as well as the editor and referees of this journal, for helpful comments. Byline: Ran Spiegler [rani@tauex.tau.ac.il] (*)

Keywords Monetary regime; Real exchange rate; Bretton Woods system; European Monetary System Abstract One of the most compelling pieces of evidence for monetary non-neutrality is the Mussa puzzle: the break in the monetary regime when the Bretton Woods system broke down increased the volatility of not only the nominal exchange rate but the real exchange rate. Using data covering forty-four countries from 1954 to 2019, I find that the Mussa puzzle is generalizable: any break in a monetary regime that changes the volatility of the nominal exchange rate also changes the volatility of the real exchange rate. This provides further evidence of monetary non-neutrality. Author Affiliation: Department of Economics, Brown University, 64 Waterman Street, Providence, RI 02906, United States of America Article History: Received 21 September 2021; Revised 2 June 2022; Accepted 9 June 2022 (footnote)[Dagger] I am grateful to Gauti B. Eggertsson, Oded Galor, Matteo Maggiori, and Pascal Michaillat for invaluable advice. I am also indebted to Joaquin Blaum, Alessandro Casini, Alberto Dalmazzo, Harry David, Giampiero M. Gallo, Vaishali Garga, Vesa-Matti Heikkuri, Ragnar Juelsrud, Jennifer Kim, Yann Koby, Manuel Lancastre, Rafael La Porta, Adam McCloskey, Emi Nakamura, Valerio Nispi Landi, Lucia Pecorario, Luca Riva, Matthias Schief, Marco Stenborg Petterson, Roberto Renò, Jón Steinsson, James H. Stock, Robin Tietz, David Weil, and participants in the Brown University Macroeconomics Graduate-Student Seminar for helpful comments and insightful suggestions. I thank Stefania Garetto, who was the editor in charge of this paper, and three anonymous referees for valuable comments that have significantly improved the quality of the paper. This research was partly conducted when the author was hosted by the Einaudi Institute for Economics and Finance; its generous hospitality is gratefully acknowledged. Byline: Cosimo Petracchi [cosimo_petracchi@brown.edu] ([Dagger])

Keywords Government procurement; Trade agreements; Gravity equation Abstract This paper estimates trade barriers in government procurement, a market that accounts for 12 percent of world GDP. Using data from inter-country input--output tables in a gravity model, we find that home bias in government procurement is significantly higher than in trade between firms. However, this difference has decreased over time. Results also show that trade agreements with provisions on government procurement increase cross-border flows of services, whereas the effect on goods is small and not different from that in private markets. Provisions on transparency and procedural requirements are particularly instrumental in increasing cross-border government procurement. Author Affiliation: (a) World Bank, 1818 H Street, Washington DC, USA (b) Aix-Marseille Univ., CNRS, AMSE, Marseille, France * Corresponding author. Article History: Received 1 March 2021; Revised 23 April 2022; Accepted 26 April 2022 (footnote)[white star] We are grateful to the editor and two anonymous referees for comments that enabled us to improve this article substantially. We are also grateful to Mario Larch and Federico Trionfetti for insightful exchanges and suggestions, and to Serena Cocciolo, Julien Gourdon, Asif Islam, Bill Maloney, Gustavo Piga, and participants to the World Bank Virtual Seminar Series on Deep Trade Agreements for useful comments. This paper is part of World Bank's ongoing work on Deep Trade Agreements and a background paper for the flagship report on Global Public Procurement and Development Impact. It has benefited from support from the World Bank's Umbrella Facility for Trade trust fund financed by the governments of the Netherlands, Norway, Sweden, Switzerland and the United Kingdom. The project leading to this publication has received funding from the french government under the 'France 2030' investment plan managed by the French National Research Agency (reference: ANR-17-EURE-0020) and from Excellence Initiative of Aix-Marseille University -- A*MIDEX . Errors are our responsibility only. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Byline: Alen Mulabdic [amulabdic@worldbank.org] (a), Lorenzo Rotunno [lorenzo.rotunno@univ-amu.fr] (b,*)

Keywords Uncertainty; Fiscal policy; Sovereign credit ratings; Ordered outcome estimation; Event study; Google Trends Abstract Periods of economic crisis and large fiscal interventions are often associated with elevated levels of uncertainty about governments' future fiscal positions. This paper studies the impact of fiscal uncertainty on sovereign credit risk, and on the attention paid to expert assessments of such risk, using the example of sovereign credit ratings. Employing data that covers the Global Financial Crisis, a measure of fiscal uncertainty is constructed that is comparable across time and a range of advanced economies. To estimate the determinants of sovereign credit risk, an empirical framework is developed that accounts for the high stability of credit ratings over time by way of a new estimator for ordered and partially unobserved outcomes. Attention to credit rating announcements is measured using movements in financial market prices and internet search volume. Results suggest that fiscal uncertainty increases the predictive power of a model of sovereign credit ratings and can explain why credit ratings are often changed more frequently during crises. Sovereign credit ratings also gain more attention when uncertainty is high with the potential to aggravate sovereign distress. Author Affiliation: University of Nottingham, School of Economics, United Kingdom * Correspondence to: University of Nottingham, School of Economics, University Park, Nottingham NG7 2RD, United Kingdom. Article History: Received 18 February 2021; Revised 9 July 2022; Accepted 13 July 2022 (footnote)[white star] An earlier version of this paper is available as European Stability Mechanism Working Paper 32 (2018), titled 'Sovereign Credit Ratings under Fiscal Uncertainty'. Byline: Arno Hantzsche [arno.hantzsche@gmail.com] (*)

Keywords Monetary policy; Nonlinear dynamics; Asset price targeting; Credit constraints; Bifurcation analysis Abstract I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, that potentially cause endogenous, nonfundamental bubbles and bursts. Booms in asset prices improve firms financing conditions and are therefore deflationary. These features significantly improve the power of the model to replicate empirical key moments. A monetary policy that targets asset prices can dampen financial cycles and reduce volatility in asset markets (dampening effect). This comes at the cost of creating an additional channel through which asset price fluctuations transmit to macroeconomic fundamentals (spillover effect). I find that unless financial markets are severely overheated, the undesirable fluctuations in inflation and output caused by the spillover effect more than outweigh the benefits of the dampening effect. Author Affiliation: University of Bonn, Germany * Correspondence to: Institute for Macroeconomics and Econometrics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany. Article History: Received 18 June 2020; Revised 18 July 2022; Accepted 19 July 2022 (footnote)1 I am thankful to Flora Budianto, Alex Clymo, Herbert Dawid, Cars Hommes, Christian Stoltenberg, Volker Wieland, Fabian Winkler, the editor Florin Bilbiie, an anonymous associate editor and referee, and participants at the 2016 DNB Learning Conference, the CEF 2016 in Bordeaux, the WEHIA 2016, the 2016 Hamburg Complexity Workshop, the CEF 2017 in New York, and seminars at Norges Bank and Goethe University Frankfurt for discussions and helpful comments on the contents of this paper. I gratefully acknowledge funding from the Bielefeld Graduate School in Economics and Management, the European Commission's EDEEM-Programme, the Alfred P. Sloan Foundation (agreement G-2016-7176 for the MMCI) at the IMFS, and financial support by the DFG under CRC-TR 224 (projects C01 and C05) and under project number 441540692. An earlier version of this paper received the 2017 Student Prize of the Society of Computational Economics. Byline: Gregor Boehl [gboehl@uni-bonn.de] (*,1)

Keywords Endogenous collateral constraints; State-contingent interest rate; Redistribution shocks; Multiple equilibria Abstract The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki--Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling belief shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki--Moore type models with unique equilibrium. Author Affiliation: (a) Aix Marseille Univ, CNRS, AMSE, Marseille, France (b) Shanghai Jiao Tong University, China (c) Balyasny Asset Management L.P., United States of America * Corresponding author. Article History: Received 1 August 2021; Revised 6 June 2022; Accepted 7 June 2022 (footnote)[white star] This paper supersedes a previous version circulated under the title 'Interest Rate Dynamics, Variable-Rate Loans, and the Business Cycle'. We thank very much the Associate Editor and referees for suggestions that led to what we hope is an improved draft, our discussants Paul Gomme, Nobuhiro Kiyotaki, Eric Mengus and Kaushik Mitra, as well as David Andolfatto, Jess Benhabib, Florin Bilbiie, Fernando Broner, Nuno Coimbra, Nicolas Dromel, Roger Farmer, Gaetano Gaballo, Luca Guerrieri, Roger Guesnerie, Leo Kaas, Todd Keister, John Landon-Lane, Giovanni Nicoló, Gilles Saint-Paul, Jacek Suda, Roman Sustek, Venky Venkateswaran, Mike Woodford and many seminar and conference participants for discussions and comments, Tao Zha for kindly sharing his codes, and Maria Arias for excellent research assistance. This work was supported by the French National Research Agency Grant ANR-17-EURE-0020, and by the Excellence Initiative of Aix-Marseille University - A*MIDEX . (footnote)1 This research was conducted while Dr. Xiaochuan Xing was a Ph.D. student in economics at Yale University. The opinions expressed in this paper are the authors' and do not reflect the views and beliefs of Balyasny Asset Management L.P. Byline: Patrick A. Pintus [patrick.pintus@univ-amu.fr] (a), Yi Wen [wenyi001@sjtu.edu.cn] (b), Xiaochuan Xing [xing@aya.yale.edu] (c,*,1)

Keywords Zero lower bound; Paradox of toil; Regime switching; New Keynesian model Abstract This paper constructs a Two-Agent New Keynesian model in which the monetary authority implements a zero lower bound interest rate policy to examine whether the paradox of toil is present (i.e., whether a payroll tax cut policy is harmful to mitigating the effects of the Great Recession) during the zero lower bound period. Five notable findings emerge from the analysis. First, when the proportion of the rule-of-thumb (RoT) households is relatively small, the implementation of a payroll tax cut policy will further deepen the Great Recession. Second, when the proportion of RoT households is relatively large, the payroll tax cut policy can be a powerful policy instrument for alleviating the Great Recession. Third, as the evidence reveals a relatively large value of the proportion of RoT households in the U.S. (up to 30%), our numerical analysis calibrated to U.S. data demonstrates that the paradox of toil does not hold. Fourth, in association with either a lower profit share, a larger lump-sum tax share, a lower degree of price stickiness, or a higher probability of the shock remaining in its short run status, an additional payroll tax cut policy tends to generate a lower short-run output multiplier. Fifth, our extensions indicate that the validity of the paradox of toil is closely related to (i) the monopolistic profit and lump-sum tax distributions between RoT and optimizing households and (ii) whether the government balances its budget by levying lump-sum taxes or issuing government bonds. Author Affiliation: (a) Institute of Economics, Academia Sinica, Taiwan (b) Department of Economics, National Chengchi University, Taiwan (c) Institute of Economics, National Sun Yat-Sen University, Taiwan (d) Department of Economics, National Taipei University, Taiwan * Corresponding author at: Ching-chong Lai, Institute of Economics, Academia Sinica, Nankang, Taipei 115, Taiwan. Article History: Received 29 July 2021; Revised 30 June 2022; Accepted 5 July 2022 (footnote)[white star] The authors would like to express their deepest gratitude to the former Editor, Florin O. Bilbiie, and an anonymous referee for their insightful instructions and excellent comments, which substantially improved the quality of the paper. The authors are also indebted to the Editor, Evi Pappa, Jui-Lin Chen, Ping-Ho Chen, Chun-Che Chi, Mei-Ying Hu, You-Xun Lu, Po-Yang Yu, and conference participants at the 2020 Taiwan Economic Association Annual Conference and Fu-Jen Catholic University for their helpful suggestions and comments. Any errors or shortcomings are, however, the authors' responsibility. Byline: Shih-fu Liu (a), Wei-chi Huang (b), Ching-chong Lai [cclai@econ.sinica.edu.tw] (a,b,c,d,*)

Keywords Beliefs; Business cycles; Consumption; Economic sentiment; Social networks Abstract This paper investigates the causal effect of economic sentiment on consumption using Gallup micro-data between 2008 and 2017. After showing that individuals update their beliefs about the national state of the economy in response to local housing and labor market fluctuations, I use the Facebook Social Connectedness Index (SCI) to construct an SCI-weighted index of housing price growth that captures individuals' exposure to housing market shocks in connected zip codes. Using plausibly exogenous variation in individuals' exposure to friends who experience heterogeneous housing price growth, I find that a standard deviation rise in economic sentiment is associated with a 17.3--24.6% rise in consumption of non-durables. Author Affiliation: Columbia Business School and Stanford University, United States of America Article History: Received 7 January 2022; Revised 19 June 2022; Accepted 30 June 2022 (footnote)[white star] The paper reflects my views only, rather than the views of any affiliated individuals/organizations or the United States. Acknowledgments. Thank you to Michael Bailey, Paul Beaudry, Nicholas Bloom, Christian Gillitzer, Joshua Gottleib, James Graham, David Hirshleifer, Jennifer La'O, Paige Ouimet, Andrew Oswald, Jonathan Parker, Luigi Pistaferri, Daniela Scur, Daniel Silverman, as well as George-Marios Angeletos, Johannes Stroebel, Laura Veldkamp, Nathanael Vallekoop, and Basit Zafar for more detailed conversations, seminar audiences, and Gallup. I also thank Brock Bobbitt for his help in constructing the SCI-weighted house price growth indices. This paper was previously distributed as 'Sentimental Business Cycles and the Protracted Great Recession'. Byline: Christos A. Makridis [cmakridi@stanford.edu]

I use Monte Carlo simulations, the jackknife and multiple forms of the bootstrap to study a comprehensive sample of 1309 instrumental variables regressions in 30 papers published in the journals of the American Economic Association. Monte Carlo simulations based upon published regressions show that non-iid error processes in highly leveraged regressions, both prominent features of published work, adversely affect the size and power of IV tests, while increasing the bias and mean squared error of IV relative to OLS. Weak instrument pre-tests based upon F-statistics are found to be largely uninformative of both size and bias. In published papers IV has little power as, despite producing substantively different estimates, it rarely rejects the OLS point estimate or the null that OLS is unbiased, while the statistical significance of excluded instruments is exaggerated. Author Affiliation: London School of Economics, U.K * Corresponding author. (footnote)# I am grateful to Isaiah Andrews, David Broadstone, Brian Finley and Frank Windmeijer for helpful comments. Byline: Alwyn Young [a.young@lse.ac.uk] (*)

Keywords Democracy; Growth; Political development; Difference-in-difference estimator; Interactive fixed effects Abstract I motivate and empirically investigate differential long-run growth effects of democratisation across countries. While the existing literature recognises the potential for such heterogeneity, empirical implementations to date unanimously assume a common democracy-growth nexus across countries. Adopting novel methods for causal inference in policy evaluation I relax the homogeneity assumption. My results confirm that in the long-run democracy has a positive and significant average effect on per capita income, albeit at 10% this is at best half the magnitude of recent estimates in the literature. Guided by existing theories, additional analysis probes the patterns of the heterogeneous 'democratic dividend' across countries. Adopting two rule-based robustness exercises I furthermore demonstrate that, in contrast to recent contributions to the literature, my approach yields empirical findings that are robust to substantial changes to the sample. Author Affiliation: School of Economics, University of Nottingham, UK Centre for Economic Policy Research, UK * Correspondence to: School of Economics, Sir Clive Granger Building, University Park, Nottingham NG7 2RD, UK. Article History: Received 23 March 2021; Revised 19 December 2021; Accepted 20 April 2022 (footnote)[white star] I am indebted to Matteo Cervellati, Marc Chan, Rodolphe Desbordes, Jonathan Dingel, Doug Gollin, Brian Knight, Simon Kwok, Gerard Padro i Miquel, Andrea Presbitero, Daniel Seidmann, Jon Temple, Daniel Treisman, Nicolas van de Sijpe, Dietz Vollrath, and Joakim Westerlund for comments and suggestions on earlier drafts which helped improve the paper significantly. Seminar/session participants at Lund, Nottingham, Middlesex, and the Annual International Conference of the Research Group on Development Economics in Berlin provided useful feedback. Changes in the light of detailed comments from two anonymous reviewers have significantly improved the paper. The usual disclaimers apply. Byline: Markus Eberhardt [markus.eberhardt@nottingham.ac.uk] (*)

Keywords Spite; Auction; Competition; Experiment; Donald Trump; Hillary Clinton Abstract While social preferences have been shown to be an important predictor in economic decision-making, they have been largely ignored in describing auction behavior. We build on theoretical models of spiteful bidding to test experimentally whether the opponent's identity impact bidding behavior in an auction. For that purpose, we collect data on competitions -- in the form of first-price auctions -- between Donald Trump and Hillary Clinton voters. We show that the opponent's identity -- i.e., the competitor supports the same candidate (friend) or the competitor supports another candidate (foe) -- influences auction behavior. Clinton voters compete more aggressively against Trump voters than against fellow Clinton voters. Data on attitudes suggests that spite might be driving this behavior. Trump voters, on the other hand, compete less aggressively against Clinton voters than against fellow Trump voters, which is explained by Trump voters' correct anticipation of their opponent's strategy. The overall behavior of Clinton and Trump voters is consistent with a model of asymmetric spiteful bidding. We conclude that preferences over the opponent seem to influence behavior even in a competitive setting. Author Affiliation: (a) University of Mannheim, Department of Economics, L7 3-5, 68131 Mannheim, Germany (b) Haas School of Business, University of California, Berkeley, CA 94720, United States * Corresponding author. Article History: Received 25 May 2021; Revised 23 March 2022; Accepted 29 April 2022 (footnote)[white star] We thank Joel Sobel, Stefano DellaVigna, Noam Yuchtman, Ned Augenblick, Jan Philipp Reiss, Serhiy Kandul, Leonard Hoeft, Benedikt Werner, Oliver Kirchkamp, two anonymous reviewers and participants at numerous conferences and seminars for helpful comments. We gratefully acknowledge funding from the Max--Planck-Society through the IMPRS-Uncertainty and the German Research Foundation (DFG) through CRC TR 224 (Project A1). This paper is dedicated to John Morgan who sadly passed away during the revision of the paper. Byline: Wladislaw Mill [mill@uni-mannheim.de] (a,*), John Morgan [morgan@haas.berkeley.edu] (b)

Keywords COVID-19; Decoupling; Carbon emissions; Renewables Abstract This paper provides novel estimates of the implicit cost of carbon abatement associated with the COVID-19 crisis. We compare that to the costs from renewable investments that would lead to similar abatement. Focusing on the Spanish economy and its power sector, we combine machine learning and simulation tools to construct a precise counterfactual of market performance in absence of the crisis. Results suggest that power sector CO2 emissions fell by 4.13 Million Tons (about 11.5%) during 2020 due to the pandemic, less than half of the actual year-on-year emissions reductions. Investing in renewables to achieve similar carbon abatement would yield an implicit cost of 60--65 Euro/Ton of CO2. Conversely, the pandemic caused a substantial GDP loss in Spain, relative to the extent of overall carbon abatement. The resulting cost of carbon abatement associated with the pandemic thus exceeded 7 thousand Euro/Ton. Author Affiliation: (a) EnergyEcoLab, Universidad Carlos III de Madrid, Spain (b) Bank of Spain, Spain * Corresponding author. Article History: Received 3 December 2020; Revised 8 January 2022; Accepted 2 March 2022 (footnote)[white star] This work has received funding from the European Research Council (ERC) under the European Union Horizon 2020 Research and Innovation Program (Grant Agreement No 772331 ELECTRIC CHALLENGES). We would like to thank the editors, Lucas Bretschger and Simone Valente, and three anonymous referees for their constructive suggestions. We also thank the forecasting department at Bank of Spain, and in particular Alberto Urtasun, for providing growth figures of past forecasting exercises, and Red Elétrica de España (in particular, Félix Martínez). Imelda and Camila Steffens provided very useful suggestions. Finally, the paper has benefited from comments by seminar participants at the Bank of Spain, WIPE (Girona), Universidad Carlos III de Madrid, the Yale/ETH EMEE 2021 Workshop, the 2021 EAERE Conference, and the 2021 EEA Congress. Byline: Natalia Fabra [natalia.fabra@uc3m.es] (a,*), Aitor Lacuesta [aitor.lacuesta@bde.es] (b), Mateus Souza [mateus.nogueira@uc3m.es] (a)

Keywords Monetary policy transmission; Housing market; Home ownership; Rents; House prices Abstract We provide empirical evidence on the heterogeneous transmission of monetary policy to the housing market across and within countries. We use household-level data from Germany, Italy and Switzerland together with the respective monetary policy shocks identified from high-frequency data. We find that the pass-through of monetary policy shocks to rates of newly originated (fixed-rate) mortgages is twice as strong in Switzerland as in Germany and Italy. After an accommodative monetary policy shock, this is associated in the housing market with a larger immediate, and persistent increase of transitions from renting to owning; a stronger decrease in rents; and an increase of the price--rent ratio. Within Italy, we find a stronger pass-through to mortgage rates, housing tenure transitions and the price--rent ratio in the northern regions that have been characterized in the literature as more financially developed than the southern regions. Author Affiliation: (a) Department of Economics, University of St.Gallen, SEW-HSG, Switzerland (b) CESifo, Germany (c) CFS, Germany (d) IZA, Germany (e) Swiss Finance Institute, Switzerland (f) Swiss National Bank, Switzerland * Correspondence to: University of St.Gallen, SEW-HSG, Varnbüelstrasse 14, 9000 St.Gallen, Switzerland. Article History: Received 19 February 2021; Revised 18 February 2022; Accepted 23 February 2022 (footnote)[white star] Winfried Koeniger and Benedikt Lennartz gratefully acknowledge support by the SNSF, Switzerland under project number 1000018-200917. We thank anonymous referees, colleagues and participants at seminars and conferences for their helpful comments; Oliver Krek for research assistance; and Peter Bolliger for the helpful discussions on the HABE dataset. This paper contains substantially revised results previously circulated with the working title 'Home Ownership and Monetary Policy Transmission'. The views, opinions, findings, and conclusions or recommendations expressed in this paper are strictly those of the authors. They do not necessarily reflect the views of the Swiss National Bank (SNB). The SNB takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in this paper. Byline: Winfried Koeniger [winfried.koeniger@unisg.ch] (a,b,c,d,e,*), Benedikt Lennartz [benedikt.lennartz@unisg.ch] (a), Marc-Antoine Ramelet [marc-antoine.ramelet@snb.ch] (f)

Keywords Shock recovery; Kalman filter Abstract When a model has more shocks than observed variables (excess shocks) the Estimated Model (EM) shock innovations will be correlated. These correlations limit the usefulness of variance and variable decompositions, as the latter use the EM shock innovations. Furthermore, any such correlations limit the ability to directly test the assumptions made about the Assumed Model (AM) shocks. These need to be correct in order to interpret impulse responses. A partial interpretation of the data may be possible if some AM shocks can be recovered. An approach to determining which shocks can be recovered when using either the current and past or all data is presented, unifying the existing methods for assessing recovery. It is applicable to a wide range of macroeconomic models. Author Affiliation: (a) School of Economics, University of Sydney, Australia (b) Melbourne Institute: Applied Economic and Social Research, University of Melbourne, Australia * Correspondence to: Level 5, Building 105, The University of Melbourne, Parkville, Victoria, 3010, Australia. Article History: Received 25 June 2021; Revised 1 March 2022; Accepted 2 March 2022 (footnote)[white star] Previously circulated as 'Too Many Shocks Spoil the Interpretation'. Some of the material appeared in an earlier working paper, . Our thanks to two anonymous referees, the Associate Editor, Ryan Chahrour, Marco Del Negro, Andrew Harvey, George Kapetanios, Mariano Kulish, James Morley, Dan Rees, Guido Turnip and participants at the 2021 International Association of Applied Econometrics Conference and Econometrics Society Australasian Meeting for extremely useful and challenging comments which have greatly improved the paper. Our thanks to Qazi Haque and Giovanni Nicolò for supplying data. This work was supported by ARC Grant DP160102654. Byline: Adrian Pagan [adrian.pagan@outlook.com] (a), Tim Robinson [tim.robinson@unimelb.edu.au] (b,*)

Keywords Fiscal transparency; Public debt; Partisan bias; Opportunistic bias; Competence; Congruence; Independent fiscal councils Abstract This paper develops a theory of fiscal transparency aimed at highlighting the potential contribution of independent fiscal councils to fiscal responsibility. In a political economy model with electoral competition, voters care about the candidates' competence to supply valuable public goods and about their congruence (subjective sense of proximity). Voters observe candidates' congruence but must form views about their competence based on the expected amount of public goods they could provide, and on other random signs about competence, public debt and the state of the economy. More transparency reduces noise around these relevant considerations. The model exhibits a bias towards excessive public debt for both 'partisan' (myopia) and 'opportunistic' (signaling competence through additional spending) motives so that institutional arrangements mitigating the debt bias carry welfare gains. While transparency about public debt itself is irrelevant, clearer signals about competence raise public debt if the incumbent enjoys a sufficiently large electoral advantage but reduce debt otherwise. Increased transparency about the state of the economy raises debt and is less valued by voters and the incumbent than greater transparency about competence. The latter is preferred by all players if the incumbent does not hold too large an electoral advantage. Otherwise, the incumbent and the public may have diverging preferences regarding greater transparency. Our analysis reveals the ambiguity about the potential contribution of independent fiscal councils (IFCs) to fiscal responsibility through increased transparency, and points to the inherent fragility of the political backing for such institutions. Author Affiliation: (a) Dean of Economics and Business, University of Amsterdam, Copenhagen Business School, European Fiscal Board, CEPR, CESifo, Netspar, Tinbergen Institute. Address: University of Amsterdam, P.O. Box 15551, 1001 NB Amsterdam, the Netherlands (b) Principal Advisor, Research Department, National Bank of Belgium, Boulevard de Berlaimont 14, 1000, Brussels (c) University of Amsterdam; Tinbergen Institute. Address: Amsterdam School of Economics, University of Amsterdam, P.O. Box 15867, 1001 NJ Amsterdam, the Netherlands * Corresponding author. Article History: Received 17 May 2020; Revised 18 March 2022; Accepted 19 March 2022 (footnote) Part of this paper was prepared when Beetsma was a Wim Duisenberg Research Fellow at the ECB. We are grateful to an anonymous referee, Josha Dekker and Xiaoxiao Zhang for excellent research assistance. We thank participants at the SEEK-ENBI Workshop on Fiscal Governance in the Eurozone: The Role of Rules, Fiscal Boards and Other Policy Innovations (Mannheim) and, in particular, our discussant Michal Horvath. We also thank participants at the ADEMU Conference 'How much of a Fiscal Union for the EMU?' (Banco d'Espana) and, in particular, our discussant, Carlos Mulas-Granados. Finally, we thank an anonymous reviewer of the ECB Working Paper series for helpful comments. The views expressed in this paper are those of the authors and do not necessarily represent those of any other organization, including the Eurosystem. (footnote) Date: March 2022. Byline: Roel Beetsma [r.m.w.j.beetsma@uva.nl] (a,*), Xavier Debrun (b), Randolph Sloof (c)

Keywords Quantitative easing; High-frequency identification; Euro area heterogeneity; ECB; PSPP; Bond scarcity Abstract This paper proposes an identification strategy for news about sovereign debt-based asset purchases. It measures sovereign yield changes that are unrelated to movements in risk-free interest rates or risk premiums. Around ECB announcements, these reflect the anticipation of shifts in the effective supply of government debt, caused by central bank purchases. This paper documents that asset purchase news about government bonds have substantial spillovers to corporate bond and stock markets, within and beyond the euro area. Spillovers are unequal across euro-area countries, as stock prices rise most in low-risk countries with very large firms. In contrast, sovereign yields fall homogeneously. Author Affiliation: University of Bonn, Bonn Graduate School of Economics, Kaiserstraße 1, 53113 Bonn, Germany Article History: Received 6 October 2020; Revised 26 October 2021; Accepted 21 March 2022 (footnote)[white star] I would like to thank the editors and two anonymous referees for providing exceptionally helpful guidance. I would also like to thank Keith Kuester, Donghai Zhang, Christian Bayer, Benjamin Born, Martin Dohmen, Peter Karadi, Marek Jarocinski, Roberto De Santis, Michele Lenza, Oreste Tristani, Evi Pappa, as well as seminar participants at the European Central Bank, the VfS Annual Conference 2020, the 7th Workshop on Empirical Monetary Economics, the 13th RGS Doctoral Conference in Economics, and the 3rd Bonn-Mannheim Ph.D. Workshop for helpful comments and suggestions. I thank the DFG for supporting my research as part of the research training group RTG 2281 'The Macroeconomics of Inequality'. Parts of this paper were written while the author was at the European Central Bank. The views expressed in this paper are those of the author. They do not necessarily coincide with those of the European Central Bank. Byline: Matthias Gnewuch [matthias.gnewuch@gmail.com]

Keywords Heterogeneous Agents; Fiscal stimulus Abstract This paper provides an analytical decomposition of the fiscal multiplier in the Heterogeneous Agent New Keynesian model. The derived expression consists of interpretable, model-based channels through which private consumption propagates government spending shocks. The calibrated model is used to estimate the magnitude of multipliers and their structure under alternative fiscal and monetary rules. The derived formula is compared to its representative agent limit to articulate the role of household heterogeneity in the transmission of government spending shocks. A two-agent version of the model is investigated to explore the consequences of cyclical inequality for the propagation of fiscal expenditures. Author Affiliation: Expert, Narodowy Bank Polski, Swietokrzyska 11/21, 00-919 Warsaw, Poland Article History: Received 16 January 2021; Revised 4 March 2022; Accepted 21 March 2022 (footnote)[white star] The views presented in this paper are those of the author, and should not be attributed to Narodowy Bank Polski. I would like to thank Adrien Auclert, Winfried Koeniger, Dirk Krueger, Per Krusell, Kurt Mitman, Christian Moser, Gernot Mueller, Xavier Ragot, Jacek Suda, Florin O. Bilbiie (editor), two anonymous referees and conference/seminar participants at RES, SaM, EABCN Warsaw, EEA, ASSA, CBMMW Oslo and the University of St. Gallen for helpful discussions and comments at various stages of this project. This paper was previously circulated as 'Household Heterogeneity and the Value of Government Spending Multiplier'. Byline: Pawel Kopiec [pawel.kopiec@nbp.pl]

Keywords War; Polarization; Radicalization; Political trust Abstract This paper investigates when and how political preferences that were shaped by conflict express themselves into electoral outcomes. During World War II, the Third Reich annexed the French eastern borderlands and forcibly conscripted their inhabitants into the Wehrmacht. While conscription was introduced in both annexed regions, the administrators' independence gave them broad discretion on how to apply the policy. As a result, different birth cohorts were drafted in different regions. I show that individuals conscripted and their descendants display reduced levels of political trust. This attitude is not reflected into aggregate municipal electoral outcomes at once. It translates into voting only with the emergence of parties that are large enough and radical enough. In the absence of parties that fulfill both conditions, these preferences lead to higher abstention. Author Affiliation: Department of Economics, University of Vienna, Oskar-Morgenstern-Platz 1, 1090 Vienna, Austria Article History: Received 30 December 2020; Revised 27 January 2022; Accepted 28 January 2022 (footnote)1 This paper features an Online Appendix containing additional results and data description. Byline: Stephanos Vlachos [stephanos.vlachos@univie.ac.at] (1)

Keywords College admissions; Discrimination Abstract Using detailed admissions data made public in the SFFA v. Harvard case, we examine how Asian American applicants are treated relative to similarly situated white applicants. Our preferred model shows that typical Asian American applicants would see their average admit rate rise by 19%, or approximately 1 percentage point, if they were treated as white applicants. We show that one of the channels through which Asian Americans are penalized is the personal rating and that including the personal rating cuts the Asian American penalty by less than half. While identifying the causal impact of race using observational data is challenging because of the presence of unobservables, this concern is mitigated in our setting. There is limited scope for omitted variables to overturn the result because (i) Asian Americans are substantially stronger than whites on the observables associated with admissions and (ii) the richness of the data yields a model that predicts admissions extremely well. Author Affiliation: (a) Duke University, United States of America (b) NBER, United States of America (c) IZA, Germany (d) University of Georgia, United States of America (e) University of Oklahoma, United States of America * Corresponding author. Article History: Received 20 September 2021; Revised 27 January 2022; Accepted 2 February 2022 (footnote)[white star] We are grateful to Peter Blair, Rafael Dix-Carneiro and Chunbei Wang for helpful comments. Peter Arcidiacono served as an expert witness for Students for Fair Admissions, Inc. (SFFA) in the SFFA v. Harvard case. SFFA is not funding his work on this paper. Josh Kinsler worked as a consultant for SFFA in the SFFA v. Harvard case. SFFA is not funding his work on this paper. The views expressed and conclusions reached in this paper are those of the authors; they do not purport to reflect the views of SFFA. To the extent this paper relies on records from the SFFA v. Harvard case, it relies solely on the public records from the case. Byline: Peter Arcidiacono (a,b,c), Josh Kinsler [jkinsler@uga.edu] (d,*), Tyler Ransom (e,c)

Keywords Two-way migration; Gains from trade; Heterogeneous workers Abstract We analyze the welfare effects of trade and migration, focusing on two-sided horizontal heterogeneity among workers and firms. Horizontal (skill-type) heterogeneity among workers generates monopsonistic labor markets as well as within-firm wage inequality and an endogenous quality of worker--firm matches. In a model combining horizontal worker heterogeneity with monopolistic competition on goods markets, trade liberalization causes firm exit which raises wage markdowns and worsens the average quality of worker--firm matches. It also increases the degree of income inequality. Yet, aggregate welfare is higher under free trade than under autarky. Integration of labor markets leads to two-way migration between symmetric countries. Liberalizing migration has an ambiguous effect on the quality of worker--firm matches and income inequality, but it leads to lower wage markdowns and lower goods prices and thus to higher welfare in both countries. Our model advocates opening up labor markets simultaneously with trade liberalization. Author Affiliation: (a) Statistics Norway, Norway (b) University of Oslo, Norway (c) CESifo, Germany (d) CEPR, United Kingdom (e) University of Tuebingen, Germany (f) GEP, United Kingdom (g) IAW, Germany * Correspondence to: Statistics Norway, Akersveien 26, 0177 Oslo, Norway. Article History: Received 22 February 2021; Revised 21 January 2022; Accepted 1 February 2022 (footnote)[white star] This is a revision of 'Heterogeneous Workers, Trade, and Migration' published as CESifo Working Paper No. 7355 (2018). This paper has greatly benefited from helpful comments by Pol Antràs, Carsten Eckel, Gabriel Felbermayr, Gene Grossman, Elhanan Helpman, Marc Melitz, Gianmarco Ottaviano, Assaf Razin, Chris Parsons, Martin Richardson, Philip Sauré, and Vitor Trindade. We also thank participants of the 27th Annual Meeting of the EEA, the Midwest International Trade Spring Meeting 2013, the 6th International Conference for Migration and Development, the 6th Sinergia-Workshop (University of Zurich) on Economic Inequality and International Trade, the Harvard Graduate Workshop in International Economics, the University of Michigan International Economics Seminar, the 12th Australasian Trade Workshop 2017, the ANU Research School of Economics Seminar 2017, and the CESifo Area Conference on the Global Economy 2018 for valuable comments and suggestions. Wilhelm Kohler gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft (DFG) under grant no. KO 1393/2-1. Inga Heiland gratefully acknowledges funding from the European Research Council under the European Union's Horizon 2020 research and innovation program (grant agreement 715147). We are grateful for very helpful comments from the editor as well as from an associate editor and two referees. Byline: Inga Heiland [inga.heiland@econ.uio.no] (a,b,c,d,*), Wilhelm Kohler [wilhelm.kohler@uni-tuebingen.de] (e,c,f,g)

Keywords Monetary policy; Sovereign risk; Bank lending; Crisis; Euro area Abstract This paper studies the transmission of non-standard monetary policy to firms' investment in a monetary union where financial frictions limit the access to external finance. The model incorporates a sovereign-banking nexus where the occurrence of sovereign default severely hits the balance sheet of domestic banks. This feature impairs monetary transmission, generating responses of lending that diverge across countries, as well as the risk of cross-border spillover effects. Specifically, I show that the liquidity injected into the stressed country's banks can result in financing the sovereign rather than boosting lending. Moreover, sovereign risk in one country can reduce asset values and, via the collateral channel, depress lending throughout the monetary union. The model sheds light on the troubled transmission of the ECB's policy measures to the economy of stressed countries during the European sovereign debt crisis. Author Affiliation: Central Bank of Ireland, Ireland Article History: Received 7 November 2019; Revised 22 December 2021; Accepted 27 January 2022 (footnote)1 This paper is based on a chapter from my Ph.D. dissertation at the University of Mannheim. I am especially grateful to Michèle Tertilt and Klaus Adam for continuous advice and encouragement. I thank the Editors Evi Pappa and Florin Bilbiie. I also thank Benjamin Born, Antonio Ciccone, Francesco Paolo Conteduca, Peter Dunne, Gabriel Fagan, Sarah Holton, Tullio Jappelli, Matthias Kehrig, Bernard Kennedy, Niccolò Lomys, Jennifer Moynihan, Marco Pagano, Morten Ravn, Saverio Simonelli, Emanuele Tarantino, Martin Uribe, Karl Whelan, Sweder van Wijnbergen, an anonymous Associate Editor, and two anonymous referees for helpful comments. I have benefitted from presentations of earlier drafts at the 2014 Frankfurt--Mannheim Macro Workshop, the 6th Petralia Applied Economics Workshop, and the 11th CSEF-IGIER Symposium on Economics and Institutions, and at seminars held at the Central Bank of Ireland, De Nederlandsche Bank, the University College Dublin, the University of Glasgow, the University of Mannheim, the University of Namur, and the University of Naples Federico II. The views expressed in this paper are mine and do not necessarily reflect those of the Central Bank of Ireland or the ESCB. All errors are mine. Byline: Giuseppe Corbisiero [giuseppe.corbisiero@centralbank.ie] (1)

Keywords Employment; Interest rates; Monetary policy; Mortgages Abstract This paper quantifies the impact of the cash-flow channel of monetary policy on employment by combining novel micro datasets with near-universal coverage. When interest rates fall, mortgaged households spend an important share of the extra cash-flow in their local economy, increasing local labor demand. Overall, a reduction in mortgage payments of £1,000 per household leads to a 0.5 percentage point increase in locally non-tradable employment growth over three years, almost entirely driven by the restaurant sector. Employment-growth effects operate through the intensive margin for small establishments, lower death rates for the mid-sized and higher birth rates for the largest outlets. Author Affiliation: Bank of England, London, EC2R 8AH, United Kingdom Article History: Received 14 February 2021; Revised 25 July 2021; Accepted 12 September 2021 (footnote)1 This paper contains the views of the author and not necessarily those of the Bank of England or its committees. The Secure Research Service agrees that the figures and descriptions of results in this paper may be published but the ONS does not necessarily endorse any interpretation of their statistical data. All statistical results remain Crown Copyright. This work uses research datasets which may not exactly reproduce National Statistics aggregates. The author would like to thank, but not implicate, Saleem Bahaj, Richard Blundell, Rhys Bidder, James Cloyne, Lisa Dettling, Martin Ellison, Angus Foulis, Andreas Fuster, Jordi Gali, Xavier Gabaix, Michael McMahon, David Miles, Ben Moll, John Muellbauer, Ricardo Reis, Johannes Stroebel, Paolo Surico, Lars Svensson, Silvana Tenreyro and two anonymous referees. Thanks also to participants at the 2018 GSE Barcelona, 2018 IAAE and 2018 EEA conferences, and seminar participants at the De Nederlandsche Bank, Federal Reserve Board, IFS, OFCE and Oxford University for helpful comments. All errors remain my own. Byline: Fergus Cumming [fergus.cumming@bankofengland.co.uk] (1)

Keywords COVID-19; Health containment policies; Non-pharmaceutical interventions; Pandemics; Economic activity Abstract This paper empirically investigates the causal linkages between COVID-19 spread, government health containment and economic support policies, and economic activity in the U.S. up to the introduction of vaccines in early 2021. We model their joint dynamics as generated by a structural vector autoregression and estimate it using U.S. state-level data. We identify structural shocks to the variables by making assumptions on their short-run relation consistent with salient epidemiological and economic features of COVID-19. We isolate the direct impact of COVID-19 spread and policy responses on economic activity by controlling for demand fluctuations using disaggregate exports data. We find that health containment and economic support policies are highly effective at curbing the spread of COVID-19 without leading to a long-term contraction of economic activity. Author Affiliation: (a) Yale University, United States of America (b) Federal Reserve Bank of St. Louis, United States of America * Corresponding author. Article History: Received 20 April 2021; Revised 18 January 2022; Accepted 29 January 2022 (footnote)[white star] We thank Bill Dupor, Max Dvorkin, and Michael Owyang for helpful discussions. We thank Jason Dunn for excellent research assistance. The views expressed in this paper are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Byline: Matthew Famiglietti [matthew.famiglietti@yale.edu] (a), Fernando Leibovici [fernando.leibovici@stls.frb.org] (b,*)

Keywords Household expectations; Inflation expectations; Experience; Information channels; Bundesbank household survey Abstract Based on a new survey of German households, we investigate the role that information channels and lifetime experience play in households' inflation expectations. We show that the types of information channels that households use to inform themselves about monetary policy are closely related to their socioeconomic characteristics. These information channels, in turn, have a major influence on the level of perceived past and expected future inflation, as well as on the uncertainty thereof. The expected future change in inflation and the unemployment rate, however, is strongly influenced by individual experience of these variables. Similarly, the expected response of inflation to a change in the interest rate is also shaped by experience. We propose the interpretation that households obtain inflation numbers from the media, but their 'economic model' is shaped by experience. Author Affiliation: (a) Heidelberg University, Germany (b) KOF Swiss Economic Institute, Switzerland (c) CESifo, Germany (d) FAU Erlangen-Nürnberg, Germany * Corresponding author. Article History: Received 15 March 2021; Revised 30 August 2021; Accepted 23 November 2021 (footnote)[white star] This paper uses data from the Bundesbank Online Pilot Survey on Consumer Expectations. We are grateful to the Bundesbank for including our questions in the survey (Project-ID: 2019-0083). The results published and the related observations and analysis may not correspond to the results or analysis of the data producers. We would like to thank the Editor, Florin Bilbiie, an anonymous referee and Michael Lamla for comments and suggestions that greatly improved our paper. We also thank Sarah Engeler und Anke Witteler for valuable research assistance. This research has received financial support by the German Science Foundation (DFG) under Priority Program 1859. Byline: Christian Conrad [christian.conrad@awi.uni-heidelberg.de] (a,b,*), Zeno Enders [zeno.enders@uni-heidelberg.de] (a,c), Alexander Glas [alexander.glas@fau.de] (d)

Keywords Capital controls; Exchange rates; Financial spillovers Abstract The global financial cycle has raised concerns about the ability of emerging markets to insulate their economy from international spillovers. Using dynamic Local Projections we show that capital controls are as potent as floating exchange rates in dampening the response of international financial shocks on domestic financial variables and the real economy. We relate this finding to muted boom--bust cycles in short-term non-resident capital flows. However, the benefits of floats or capital controls are reaped in isolation, that is, either tool is enough. We attribute this pattern to nominal frictions in domestic labor markets. Author Affiliation: (a) University of Munich (LMU), Germany (b) Federal Reserve Bank of Kansas City, United States of America * Corresponding author. Article History: Received 12 July 2020; Revised 16 December 2021; Accepted 20 December 2021 (footnote)[white star] We thank James Cloyne, Andreas Haufler, Hiro Ito (discussant), Òscar Jordà, Katheryn Russ, Alan M. Taylor, two anonymous referees, an anonymous associate editor, and editor Florin O. Bilbiie for helpful advice, feedback and comments on the paper. Furthermore, we are grateful to participants of the Public Economics Seminar in Munich, the Brown-Bag series in Davis, the 8th Annual West Coast Workshop in International Finance in Seattle and the 56th Annual Conference of the Missouri Valley Economic Association in Kansas City. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Florian Loipersberger acknowledges funding by the German Research Foundation (DFG) through GRK 1928. Byline: Florian Loipersberger [florian.loipersberger@econ.lmu.de] (a), Johannes Matschke [Johannes.Matschke@kc.frb.org] (b,*)

Keywords Intangible capital; Borrowing constraints; Interest rates; Capital misallocation Abstract We study theoretically and empirically how the increase in the intensity of intangible capital in production in recent decades affects the sensitivity of investment to interest rates. In contrast to tangible capital, intangible capital has low collateral value and must be financed in a larger part with accumulated corporate savings, especially in more financially constrained firms and for more lumpy investments. High-intangibles firms are, therefore, more likely to be net savers in equilibrium, and for such firms low interest rates are not as stimulative as for high-tangibles firms. We show in a realistically calibrated model that the rise of intangible capital substantially dampens the positive effects of low interest rates on investment because of this mechanism, increasing the misallocation of resources. We find strong empirical support for this effect by studying the investment decisions of U.S. firms. Author Affiliation: (a) Universitat Pompeu Fabra, Spain (b) Centre de Recerca en Economia Internacional (CREI), Spain (c) Barcelona School of Economics, Spain (d) Federal Reserve Board, United States of America * Corresponding author. Article History: Received 2 November 2020; Revised 4 July 2021; Accepted 9 August 2021 (footnote)[white star] A previous version of this paper was entitled 'Capital Misallocation and Secular Stagnation'. We thank Andrew Abel, Fiorella de Fiore (discussant), Wouter Den Haan (discussant), Andrea Eisfeldt, Maryam Farboodi (discussant), Simon Gilchrist, Adam Guren, Matteo Iacoviello, Arvind Krishnamurthy, Tim Landvoigt (discussant), Claudio Michelacci (discussant), Guillermo Ordonez, Enrico Perotti, Stefan Pitschner, Vincenzo Quadrini, Per Stromberg, Stephen Terry, and seminar participants at Boston University, Boston College, the Federal Reserve Board, the Bank of Spain, the CREI macro lunch, the University of Montreal, Uppsala University, Swedish House of Finance, American University-Kogod, the 7th Meeting of the Macro Finance Society (UCLA 2016), the 2016 Barcelona Summer Forum Workshop on Financial Markets and Asset Prices, the 2016 NBER SI Workshop on Macro, Money and Financial Frictions, the Midwest Macro Meetings, the Cleveland Fed Day-Ahead Meeting on Productivity, the BoE Workshop on Finance, Investment and Productivity, the Bank of Italy Workshop on Macroeconomic Dynamics, the 2018 AEA, and the 2019 North American Summer Meeting-Econometric Society for very helpful comments. We also thank Christoph Albert for excellent research assistance. Andrea Caggese acknowledges financial support from the Spanish Agencia Estatal de Investigación (AEI), through the Severo Ochoa Programme for Centres of Excellence in R&D (Barcelona School of Economics CEX2019-000915-S) and from Recercaixa . The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System. All errors are our own responsibility. Byline: Andrea Caggese (a,b,c), Ander Pérez-Orive [ander.perez-orive@frb.gov] (d,*)