- Marginal propensities to consume with behavioural agents
I use survey questions on spending in hypothetical scenarios to study differences in marginal propensities to consume out of positive and negative income shocks. I find a sizeable asymmetry in spending responses driven by large adjustments following income losses compared to small adjustments following income gains. This asymmetry occurs irrespective of the position in the wealth distribution and is not driven by liquidity constraints. As such, it stands in stark contrast to predictions of traditional models of consumption behaviour. I develop a model with dissaving-averse households, a behavioural feature consistent with mental accounting, that rationalizes this asymmetry and simultaneously generates low MPCs out of income news, low MPCs out of wealth and high MPCs out of income gains for households that are not liquidity-constrained. I show through the lens of a quantitative model that asymmetric MPCs dampen the effectiveness of redistributive fiscal policy.
Work in progress
- Equity duration and monetary policy transmission, with J. Graeb
- The Reliability of Equilibrium Exchange Rate Models: A Forecasting Perspective,
with M. Ca’Zorzi, A. Cap and M. Rubaszek
International Journal of Central Banking (2022)
ECB Working paper version, Replication files, Slides for ISF21
Coverage: Econbrowser, Macrohive
In this paper we evaluate the predictive power of the three most popular equilibrium exchange rate concepts: Purchasing Power Parity (PPP), Behavioral Equilibrium Exchange Rate (BEER) and the Macroeconomic Balance (MB) approach. We show that there is a clear trade-off between storytelling and forecast accuracy. The PPP model offers little economic insight, but has good predictive power. The BEER framework, which links exchange rates to fundamentals, does not deliver forecasts of better quality than PPP. The MB approach has the richest economic interpretation, but performs poorly in forecasting terms. Sensitivity analysis confirms that changing the composition of fundamentals in the BEER model or modifying key underlying assumptions in the MB model does not generally enhance their predictive power.