Research
Job Market Paper
Expectations and the Transmission of Monetary Policy
with Tomás E. Caravello
Abstract: Monetary policy works largely through expectations: core transmission channels, including long-term yields, mortgage rates, and investment, depend on expected future policy. Markets interpret current choices as informative about the central bank's real-time readings of the economy—readings that persist and guide future policy. When choosing a rate, the central bank takes as given how markets interpret its decisions. However, its systematic behavior shapes that interpretation, and hence how strongly mistakes in those readings affect the economy. We show that this creates a time-inconsistency problem: optimal meeting-by-meeting policy can leave market expectations excessively sensitive to policy surprises, amplifying the effects of those mistakes. We quantify this mechanism's importance in an extended New Keynesian model estimated using macroeconomic data, Federal Reserve forecasts, natural-output uncertainty estimates, and inflation-swap responses to policy surprises. The optimal ex ante rule substantially reduces output-gap volatility by responding less aggressively overall, especially to estimates of natural output.
Working Papers
Forward Guidance for Skeptical Markets
Abstract: This paper develops a theory of forward guidance that captures two key features of central bank communication: announcements are not fully state-contingent, and the private sector is wary of policy mistakes. The central bank tailors announcements along two central dimensions: (i) vagueness—how tightly the announcement constrains future policy; and (ii) data dependence—how aggressively future policy responds to a public signal of the economy. Three main lessons emerge. First, uncertainty affects communication differently depending on its source: sufficiently high uncertainty about either demand or cost-push shocks calls for vaguer guidance, but only demand-side uncertainty increases the optimal degree of data dependence. Second, strict rules are costly: fully precise guidance entails sizable stabilization losses, especially when the Phillips curve is steep. Third, because of the stabilizing role of announcements, optimal forward guidance differs sharply from simply communicating the best forecast of the future optimal policy rate (Delphic guidance).
Market Interpretation and Uncertainty in Monetary Transmission [coming soon]
with Tomás E. Caravello
Abstract: Monetary policy decisions affect current economic activity largely through what markets infer about future policy. Uncertainty about how a decision will be interpreted is thus a central source of uncertainty about how strongly policy affects economic activity (transmission uncertainty). We study this in a model where markets infer the central bank's persistent real-time assessments of the state of the economy from its decisions. The systematic policy rule shapes this inference, making transmission uncertainty endogenous to policy. We show that under discretion, uncertainty about the market's interpretation of policy decisions induces a cautious response. This caution can itself increase transmission uncertainty and become self-reinforcing, sustaining multiple equilibria. Commitment to an ex ante rule improves stabilization along two novel margins. First, increasing the overall scale of the policy reaction improves stabilization without raising its exposure to interpretation risk. Second, commitment avoids the arbitrarily large losses that can arise from self-reinforcing caution.
Work in Progress
Financial Attention and Macroeconomic Stabilization
I study how monetary policy shapes financial intermediaries' incentives to acquire information about credit risk, and how this affects credit supply and macroeconomic stabilization. The analysis highlights a trade-off between limiting amplification through financial attention and pursuing the central bank’s preferred stabilization policy. Next, I plan to study how monetary policy affects the allocation of attention between aggregate and firm-specific risks, and to quantify financial attention's role in shock propagation.
When Does Uncertainty Justify Monetary Policy Gradualism?
with Tomás E. Caravello
Uncertainty about monetary transmission is a classic rationale for gradualism in monetary policy. We ask when that logic actually goes through. Our results distinguish attenuation from persistence: uncertainty can dampen policy movements without making interest rates more persistent. Whether it does so depends on its source and the economy's structure. Ongoing work studies how transmission and forecast uncertainty interact and what share of observed monetary policy gradualism can be explained by transmission uncertainty.
Teaching
MIT Department of Economics
- Advanced Macroeconomics I (14.461), PhD — Teaching Assistant, Fall 2023 and Fall 2025
- Principles of Macroeconomics (14.02), UG — Teaching Assistant, five semesters, 2024–2026
MIT Sloan School of Management
- Foundations of Modern Finance (15.415), Master of Finance — Teaching Assistant, Summer 2023
- Financial Mathematics (15.454), Master of Finance — Teaching Assistant, Summer 2022
Universidad Adolfo Ibáñez
- Intermediate Microeconomics — Instructor, two semesters, 2020–2021