Working Papers
Working Papers
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Factor-Augmented VARs with Noisy Factor Proxies (with Soroosh Soofi-Siavash), Working Paper, September 2026
Abstract
Factor-augmented VARs (FAVARs) combine latent factors extracted from large panels with factors that are assumed to be perfectly observed. We relax this assumption by treating individual variables as noisy factor proxies. Our proposed estimation approach iterates between principal component extraction and reduced-rank regression and allows multiple proxies to inform factor estimation. The estimated factors are shown to be consistent in the presence of weak factors. A group-lasso extension enables sparse proxy selection, and a cross-validation scheme jointly selects model dimensions and tuning parameters. Monte Carlo evidence shows that the method substantially improves factor estimation and forecasting with weak factors, and reduces bias in structural impulse response estimation when observable factor proxies are measured with error. We document the usefulness of our approach in a recursive pseudo-out-of-sample bond return forecasting analysis.
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Extreme Weather Events, Fiscal Space, and the Term Structure of Sovereign Debt (with Robin Schaal), CEPR Discussion Paper No. 21479, May 2026
Abstract
We study the impact of extreme weather events on global sovereign bond yields. Using state-dependent panel local projections, we show that the sovereign’s fiscal position determines the sign of the yield response to natural disaster shocks. Yields decline significantly in fiscally constrained economies and rise in unconstrained ones, a pattern that remains masked in unconditional specifications. The reason is that government expenditure increases in unconstrained economies and remains flat in constrained ones, generating divergent inflationary dynamics that transmit to the yield curve. The state-dependent transmission operates through different channels. In advanced economies, the yield response is driven by the expected path of policy rates, while the term premium plays a larger role in emerging markets. Our findings highlight fiscal space as a key determinant of how climate shocks propagate through sovereign debt markets.
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Is There Hope for the Expectations Hypothesis? (with Richard K. Crump and Stefano Eusepi), Federal Reserve Bank of New York Staff Reports No. 1098, February 2026
Abstract
Most macroeconomic models impose a tight link between the term structure of interest rates and expected future short rates via the expectations hypothesis (EH). While systematically rejected in the data, existing tests of the EH typically assume full information rational expectations, stationarity of beliefs, or both. As such, they are ill-equipped to refute the EH when these assumptions fail to hold, leaving the door open for a “resurrection.” We re-evaluate the EH using direct measures of expected short rates from all available U.S. surveys of professional forecasters, combined with a parsimonious model of expectations formation to construct the term structure of expectations. We show that deviations from rationality and time variation in long-run beliefs consistent with the observed survey data, while sizable, do not come close to bridging the gap between the term structure of expectations and the term structure of interest rates. We introduce a novel test of the EH and show that the EH is decisively rejected in the data. Outside of short maturities, expectations display, at best, only a weak co-movement with the forward rates of corresponding maturities, both unconditionally and in response to a monetary policy shock.
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Reaching for Beta (with Altan Pazarbasi and Egemen Genc), Working Paper, December 2025
Abstract
Using data on equity mutual fund portfolio allocations and transactions, we show that a rise in short-term interest rates via contractionary monetary policy leads fund managers to tilt their portfolios towards stocks with higher market exposure. This Reaching for Beta is persistent and increases the net buying pressure of high-beta stocks. Funds that actively reach for beta experience more inflows when monetary policy is restrictive, while they deliver higher raw returns but no significant alpha after controlling for market and other risk factors. Funds’ demand for high beta stocks induces systematic price pressures, which take several months to dissipate. In contrast to reaching for yield, which associates low interest rates with risk-shifting, reaching for beta implies that tighter monetary policy increases risk-taking in the equity market.
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Energy-saving technology shocks, emissions, and the macroeconomy (with Soroosh Soofi Siavash), CEPR Discussion Paper No. 19656, June 2025
Abstract
We use restrictions derived from frontier models of directed technical change to identify green and non-green technology shocks in a Bayesian structural VAR of the U.S. economy. We require that both shocks jointly explain the bulk of the longer-run variation of total factor productivity and fossil fuel energy intensity. In addition, the fossil energy income share is restricted to decline following a green and to increase after a non-green technology shock. We find that green technology shocks are associated with a persistent reduction of the carbon emission intensity of output but a substantial rebound of per capita emissions. The reason is that these shocks lead to a delayed but pronounced increase of output which gives rise to substantial additional fossil fuel consumption and new emissions. Green technology shocks are associated with a substitution of fossil fuel end-use to electricity, much of which has historically been generated using fossil fuels.
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Mining Shocks, Blockchain Security, and the Value of Bitcoin (with Soeren Karau), CEPR Discussion Paper No. 20141, April 2025
Abstract
We study the implications of Bitcoin’s security model for its market valuation. We identify mining shocks by exploiting exogenous variation in mining intensity using a narrative approach in a structural Vector Autoregression. While their impact on transaction speed is short-lived, mining shocks persistently affect trading volumes and market valuations, explaining up to 15 percent of Bitcoin’s substantial price variation. Our findings can be rationalized in a theoretical framework where mining shocks affect the likelihood to withstand potential attacks and as such impact investor beliefs about the future state of the network and thus Bitcoin’s usefulness as a means of payment.
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How Do We Learn About the Long Run? (with Richard K. Crump, Stefano Eusepi and Bruce Preston), Federal Reserve Bank of New York Staff Reports No. 1150, April 2025
Abstract
Using a novel and unique panel dataset of individual-level professional forecasts at short, medium, and very-long horizons, we provide new stylized facts about survey forecasts. We present direct evidence that forecasters use multivariate models in an environment with imperfect information about the current state, leading to heterogenous non-stationary expectations about the long run. We show forecast revisions are consistent with the predictions of a multivariate unobserved trend and cycle model. Our results suggest models of expectations formation which are either univariate, stationary, or both, are inherently misspecified and that macroeconomic modelling should reconsider the conventional assumption that agents operate in a well-understood stationary environment.
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Household beliefs about fiscal dominance (with Philippe Andrade, Erwan Gautier, Eric Mengus, and Tobias Schmidt), March 2025
Abstract
We study beliefs about fiscal dominance in a survey of German households. We first use a randomized controlled trial to identify how fiscal news impact individual debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect higher debt-to-GDP ratios make them more likely to revise upward their inflation expectations. These average effects are due to individuals who think that fiscal resources are more stretched than others. In contrast, individuals who think there is fiscal space do not associate debt with inflation. We then rationalize these results in a New Keynesian model where agents have heterogeneous beliefs about the fiscal space. We show that the heterogeneity of beliefs implies a policy tradeoff for the central bank. Agents who expect fiscal dominance in the future exert upward pressure on inflation. An active central bank may choose to partially tolerate this higher inflation due to the real costs of completely stabilizing prices.
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The Asymmetric and Persistent Effects of Fed Policy on Global Bond Yields (with Tobias Adrian, Gaston Gelos and Nora Lamersdorf), BIS Working Paper No. 1195, July 2024
Abstract
We document that U.S. monetary policy shocks have highly persistent but asymmetric effects on U.S. Treasury and global bond yields, with a clear break around the Great Financial Crisis (GFC). Prior to the GFC, tightening shocks used to lead to a pronounced hump-shaped increase of Treasury yields across maturities. Yields used to respond little to easing shocks as term premiums would rise strongly, offsetting the associated decline of expected policy rates. Since the GFC, term premiums have been declining persistently following both tightening and easing shocks. As a result, post-GFC tightening shocks only have transitory positive effects on yields, which reverse later. The response of advanced-economy and emerging market sovereign yields essentially mimics the pattern observed for Treasury yields. Consistent with recent work by Kekre et al. (2022) we find that changes in the duration of primary dealer Treasury portfolios pre- and post-GFC are highly informative about the sign of the term premium response to policy shocks, but cannot explain the full picture. The observed puzzling persistence of returns is likely to stem at least in part from slow and persistent mutual fund flows following monetary policy surprises.
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Forceful or Persistent: How the ECB's New Inflation Target Affects Households' Inflation Expectations (with Mathias Hoffmann, Lora Pavlova, and Guido Schultefrankenfeld), Deutsche Bundesbank Discussion Paper No. 27/2023
Abstract
We study how households adjust their medium-term inflation expectations under the new ECB strategy. We find that survey respondents make little difference between the previous strategy of targeting inflation rates close to but below 2% and the new strategy with a symmetric 2% target. Yet, participants informed that the ECB might tolerate rates exceeding the target for some time, expect somewhat higher medium-term inflation. Respondents asked to assume inflation currently running below target place a significantly higher probability on outcomes above 2% in the medium term. Participants do not expect an undershooting when inflation is currently running above target.
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Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates (with Shuo Cao, Richard K. Crump and Stefano Eusepi), Federal Reserve Bank of New York Staff Reports No. 934, July 2021
Abstract
Using a unique data set of individual professional forecasts, we document disagreement about the future path of monetary policy, particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits Treasury yields and the short rate paths predicted by different groups of investors and thus matches the observed differences in expected return profiles. Investors who correctly anticipated the secular decline in rates became increasingly important for the marginal pricing of risk in the Treasury market. Accounting for heterogeneity in investment performance eliminates the downward trend in the term premium.