Jonathan Kreamer

Since sectors differ in their sensitivity to interest rates, monetary policy produces inefficient sectoral fluctuations.  In a model with sectoral heterogeneity, I show that policymakers should weight sectors proportionally to their interest elasticities, account for dynamic demand effects from durable goods, and systematically utilize forward guidance to reduce sectoral volatility. A calibrated model confirms these recommendations, and finds that neglecting sectoral volatility produces substantial welfare losses. The best-performing policy rule stabilizes a sectorally-weighted measure of inflation, plus lags of past durable inflation. 

I study the role of financial intermediaries in supplying liquidity to the real economy.  Firms hold liquid assets to meet unanticipated expenses. Financial intermediaries supply liquidity by pooling partially liquid assets, but their ability to commit future funds depends on their capital. When liquidity is scarce, there is a positive liquidity premium and investment is inefficiently low. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity and find that when private liquidity is scarce the government should issue bonds for their liquidity properties, providing justification for countercyclical budget deficits.

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation at center stage. We develop a model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit.

When sectors differ in their sensitivity to interest rates, exclusive reliance on monetary policy produces inefficient sectoral volatility, and there is a role for active fiscal policy to complement monetary policy. I analyze optimal joint fiscal and monetary policy in a multisector model. I derive simple conditions for optimal policy without commitment in terms of sectoral labor wedges and fiscal demand elasticities. The optimal fiscal policy is countercyclical when public goods are complements of private goods, and procyclical when public goods are substitutes in demand or inputs into production. I then examine fiscal and monetary policy rules in a calibrated two-sector model subject to Calvo pricing frictions.  I find that there are substantial welfare gains from active fiscal policy, and that it is optimal for public spending to respond strongly to sectoral inflation. These results hold even when fiscal policy is subject to significant implementation delays.

I study the dynamics of an economy with endogenous unemployment risk in a liquidity trap. Expectations of high unemployment increase precautionary saving and worsen credit conditions, reducing demand. When the interest rate cannot fall in response, pessimistic expectations are self-fulfilling and multiple equilibria exist. For a particular equilibrium, this channel amplifies demand shocks and slows the pace of deleveraging from a high debt state. An endogenous borrowing constraint increases amplification, but speeds up deleveraging.

Recent evidence suggests shocks to household balance sheets contributed to employment losses during the 2007 - 2009 recession in the U.S. Motivated by these findings, I consider a model in which credit provides liquidity to consumers.  If available credit is sufficient to finance desired consumption, the model is identical to a standard growth model.  However, when there is insufficient credit, consumer demand falls and output is inefficiently low.  Credit constraints are endogenous and depend on the return to production.  A demand shock can trigger an amplification process, where lower demand reduces the return to production, tightening available credit and reducing demand further. In a crisis state, there is equilibrium underconsumption and overproduction.  In normal times, there is equilibrium oversmoothing: oversaving by wealthy households and overborrowing by poor households. There is a clear role for policy, as government spending stimulates demand and relaxes consumer borrowing constraints.