Research

Abstract
Government bonds in advanced economies shifted from moving in sync with stocks to acting as "safe" hedges in the late 1990s, then reverted to being "risky" after 2022. An analysis of twelve countries over the post-war period shows these shifts occurred simultaneously and aren't fully explained by changes in output and inflation. Using a Dynamic Factor Model and a novel identification strategy, I find that financial shocks, driving flight-to-safety dynamics post-1998, better explain the shifts.

Abstract
Currencies that are more exposed to US monetary policy yield positive average excess returns. This result holds both for pure monetary policy shocks and for central bank information shocks, identified via sign restrictions on interest rate surprises using high-frequency data. Currency characteristics help explain the heterogeneity of these exposures across currencies and time. We then build exposure indices to gauge this effect around policy announcements. Long-short trading strategies that condition on such exposure indices display significant excess returns after controlling for dollar, carry and momentum factors.

Abstract
We develop methods to draw from any posterior distribution of a VAR that encodes a priori skepticism about large amounts of return predictability while imposing the Campbell-Shiller restrictions. In doing so, we show how a common empirical practice of omitting dividend growth from the system amounts to imposing the extra restriction that dividend growth is not persistent. We highlight that persistence in dividend growth induces a previously overlooked channel for return predictability, which we label "dividend momentum." Compared to estimation based on OLS, our restricted informative prior leads to a much more moderate, but still significant, degree of return predictability, with forecasts that are helpful out-of-sample and realistic asset allocation prescriptions with Sharpe ratios that out-perform common benchmarks.

Abstract
Military spending has sizable effects on long-run growth because it shifts the composition of public spending towards R&D. This boosts innovation and private investment in the medium-term, and increases productivity and output at longer horizons. Public R&D expenditure stimulates long-run growth even when it is not associated with war spending. In contrast, the effects of public investment are shorter-lived and the impact of public consumption is modest at most horizons. We reach these conclusions using Bayesian Vector Auto Regressions (BVAR) with up to sixty lags and 125 years of quarterly data for the United States, including newly reconstructed series of government spending broken down into its main categories since 1890.

[ Online Appendix ] [ Pre-Print version ] [ Data and Matlab Code ]

Abstract
A key question for households, firms, and policy makers is: how is the economy doing now? This paper develops a Bayesian dynamic factor model that allows for nonlinearities, heterogeneous lead–lag patterns and fat tails in macroeconomic data. Explicitly modeling these features changes the way that different indicators contribute to the real-time assessment of the state of the economy, and substantially improves the out-of-sample performance of this class of models. In a formal evaluation, our nowcasting framework beats benchmark econometric models and professional forecasters at predicting US GDP growth in real time.

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Abstract
Conditional forecasts and "stress tests" are typically constructed by specifying the future path of one or more endogenous variables, while remaining silent about the underlying structural shocks that might have caused that path. We develop efficient algorithms to construct "structural scenarios", where a particular shock has caused the path, in the context of set and partially identified Structural VARs. We also propose a metric to assess the plausibility of alternative scenarios.

[ Online Appendix ] [ Pre-Print version ]

Abstract
We propose a new class of sign restrictions based on narrative information. Narrative sign restrictions constrain the structural parameters by ensuring that around a handful of key historical events the structural shocks and historical decomposition agree with the established narrative. Our method combines the appeal of narrative approaches with the advantages of sign restrictions.

[ Online Appendix ] [ Pre-Print version ] [ Data and Matlab Code ]

Abstract
Using a dynamic factor model that allows for changes in both the long-run growth rate of output and the volatility of business cycles, we document a significant decline in long-run output growth in the United States and other advanced economies. Featured in: Financial Times | VOX | The Telegraph

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