Essays in Macroeconomics

This thesis is a contribution to macroeconomics and macro-finance research. It focuses on two areas, the interactions between debt markets and the macroeconomy, in the first two chapters, and consumption heterogeneity’s role in the transmission of shocks, in the third. The first chapter is my job market paper, “Monetary Policy and the Maturity Structure of Public Debt”. It studies the mediating impact of the maturity structure of public debt in the transmission of monetary policy shocks to economic activity. A longer debt maturity attenuates greatly the effect of monetary policy: going from the average historical duration of US debt to very short term debt doubles the impact of a rise of the policy rate on output. A similar result holds in UK data. There is no differential effect on inflation. I show that these effects can be traced back to a quantitatively important financing channel. A model featuring an interaction between an empirically estimated primary market friction and a standard financial accelerator is able to account for these facts. The second chapter of the thesis is “The Fiscal Consequences of Missing an Inflation Target”. This is a joint work with Helene Rey. We show, in Euro Area countries and in the US, the effect of the reliability of central banks’ monetary policy on public finances. When a credible central bank misses its inflation target, this has large fiscal consequences for the fiscal authority. These misses are quantitative sizable in the past low inflation decade, especially for countries with a high level and a high maturity of public debt. We link our results to the optimum currency area literature as the monetary-fiscal nexus is key to the functioning of the Euro Area: the ECB sets monetary policy for sovereigns with heterogeneous debt profiles. The third chapter of my thesis, “LESS is MORE: Consumer Spending and the Size of Economic Stimulus Payments”, is a joint work with Paolo Surico. We study the consumption response to unexpected transitory income gains of different size, using hypothetical survey questions. Affluent households exhibit a higher Marginal Propensity to Consume (MPC) out of large gains while families with low cash-on-hand display a higher MPC out of small gains. The spending of higher earners is consistent with the predictions of a model with non-homothetic preferences on consumption, while spending of low-income families can be accounted for by borrowing constraints. Our results suggest that, for a given level of public spending, a fiscal transfer of smaller size paid to a larger group of low-income households stimulates aggregate consumption more than a larger transfer paid to a smaller group.