Working Papers

This paper studies the spillover effects of US quantitative easing on emerging market economies. I estimate the spillover effects using Bayesian VAR models for the US economy and a set of emerging market economies. A 1% increase in the Federal Reserve’s securities held outright has positive and statistically significant effects on real GDP, real Investment, the price level, and asset prices in the US economy. Emerging market economies experience positive statistically significant effects on real GDP, real investment, inflation, and stock market indices, along with currency appreciation, current account deterioration, and increase in their long-term bond yields. Then I build a two-country Heterogeneous-Agents New Keynesian model with QE shocks and dollarized bank balance sheets in the EMEs. The model is estimated to match the empirical movements. Bank balance sheets are at the heart of the international transmission mechanism. The choice between HANK vs. RANK matters for the magnitude of the impulse responses since the absence of heterogeneity leads to lower aggregate demand in both countries and significant exchange rate movements that can reverse this adverse effect. The model predicts that QE decreases inequality in the medium run, but in the short run, wealth inequality rises. Finally, policies aiming to reduce the flow of capital between countries, such as capital controls, have significant adverse effects on economic activity and welfare.

This paper studies the effects of fiscal policy on aggregate economic activity and inequality when the monetary authority follows conventional and unconventional policies. First I build a three-agent Preferred Habitat New Keynesian (PHANK) model with a banking sector in which QE matters for the determination of output in the short run. I analytically derive the fiscal multiplier and show that it decreases in the presence of countercyclical QE policies, even at the ZLB. However, countercyclical QE tends to decrease consumption inequality. A calibration of the model for the US economy yields fiscal and QE multipliers close to 3 when the monetary authority pegs the short-term policy rate. The optimal fiscal and QE policies are expansionary at the ZLB. I also consider a medium-scale HANK model to further study the distributional effects of fiscal expansions under QE and recompute the fiscal multipliers. In the enhanced model, the government spending multiplier at the ZLB is 1.279. Countercyclical QE after a fiscal expansion reduces consumption inequality but increases wealth inequality.

This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.