Boris Chafwehé
Endogenous forward guidance
joint with Oikonomou Rigas, Priftis Romanos and Vogel Lukas

We propose a novel framework where forward guidance (FG) is endogenously determined. Our model assumes that a monetary authority solves an optimal policy problem under commitment at the zero-lower bound. FG derives from two sources: from committing to keep interest rates low at the exit of the liquidity trap to stabilize inflation today, and from debt sustainability concerns, when the planner takes into account the consolidated budget constraint in optimization. In the case where optimal policy reflects debt concerns monetary policy becomes subservient to fiscal policy. We show analytically that this regime is isomorphic to a 'passive monetary /active fiscal policy' regime in the sense of Leeper (1991). Instead, under no debt concerns, monetary policy is 'active' and fiscal policy ensures debt sustainability. During liquidity trap (LT) episodes, the presence of debt concerns makes monetary policy ineffective in stabilizing inflation. Under no debt concerns, however, keeping interest rates low increases inflation and helps the economy escape from the LT.  We embed our theory into a DSGE model and estimate it with US data. Our findings suggest that FG during the Great Recession most likely did not reflect debt sustainability concerns, rather policy reflected a strong commitment to stabilize inflation and the output gap.

Laurène Bocognano
Optimal unemployment insurance with endogenous preferences
joint with Bruno Decreuse

This paper mixes state-dependent utility theory with endogenous preferences to investigate the optimality of unemployment insurance. In our model, individuals assign weights to consumption units in two possible states: work or unemployment. The higher the weight assigned to consumption in the work state, the lower the one assigned to consumption in the unemployment state. These weights shape the magnitude of moral hazard effects while searching for jobs as well as the desire for unemployment insurance. The model can predict that the demand for social insurance remains low despite unemployment exposure is large. In a sufficient statistics approach à la Chetty, we find a new sufficient statistics formula which takes into account the optimality of employment preferences. We show that unemployment insurance is higher than the optimal level in many countries due to high preferences for work, except for the UK, where unemployment insurance is very low.