Jón Steinsson | Macro Paper Warehouse

The Macroeconomic Consequences of Exchange Rate Depreciations

Research Question

How does an exchange rate depreciation causally affect macroeconomic outcomes? The paper asks whether depreciations are expansionary or contractionary, and through which mechanism. The core identification challenge is endogeneity: exchange rate changes are driven by shocks that simultaneously affect output, making causal inference from unconditional variation misleading.

Empirical Strategy

The paper studies “regime-induced” exchange rate depreciations by comparing macroeconomic outcomes for countries that peg their currency to the US dollar versus countries whose currencies float against the US dollar, in response to movements in the US dollar’s value. The identifying variation arises from the interaction between a country’s pre-existing exchange rate regime (peg vs. float) and changes in the US dollar’s nominal effective exchange rate (NEER), as measured by the BIS trade-weighted index against 24 relatively advanced economies (which are excluded from the analysis). This variation — which amounts to roughly 8% of total exchange rate variation in the sample — isolates a component of bilateral exchange rate changes that is orthogonal to idiosyncratic domestic shocks. The empirical specification is a local projection (Jorda, 2005) on annual data from 1973 to 2019 with country fixed effects and region-by-time fixed effects (four regions: Europe, Americas, Africa, Asia/Oceania). The main estimating equation regresses cumulative changes in outcome variables on the interaction term Peg × ΔUSD at horizons h = 0 to 9. Standard errors are two-way clustered by time and country. Exchange rate regime classification follows Ilzetzki, Reinhart, and Rogoff (2019); observations classified in the most ambiguous intermediate categories (coarse category 3) are dropped from the baseline.

The Power of Forward Guidance Revisited

This paper shows that the striking power of far-future forward guidance in standard New Keynesian models – a phenomenon the literature has dubbed the “forward guidance puzzle,” in which promised interest rate changes further in the future can have larger, even explosive, effects on current output and inflation than near-term changes – depends critically on the assumption of complete markets. The mechanism behind the puzzle is that the model’s consumption Euler equation, solved forward, implies current consumption responds to an undiscounted sum of expected future real-rate changes, so a household’s consumption jumps immediately and by the same amount whether a promised rate cut is one quarter or five years away. The authors argue this is unrealistic: households facing uninsurable idiosyncratic income risk and borrowing constraints will be reluctant to run down precautionary savings to fully exploit a distant promised rate cut, since doing so leaves them more exposed to future income shocks before the cut even arrives. Embedding this logic in a general equilibrium incomplete-markets New Keynesian model, the paper finds that the effect of forward guidance falls monotonically with horizon – about 40 percent of the complete-markets effect for guidance five years out, and essentially zero at ten years – with the degree of “discounting” increasing in the amount of idiosyncratic risk households face and decreasing in the level of assets available for self-insurance. The same mechanism substantially weakens forward guidance as a tool for escaping a zero-lower-bound recession: an extension of near-zero rates that would fully eliminate a simulated Great-Recession-sized downturn under complete markets leaves a substantial recession and much larger deflation under incomplete markets.

When Did Growth Begin? New Estimates of Productivity Growth in England from 1250 to 1870

Research Question. When did sustained productivity growth begin in England? This paper constructs new estimates of the evolution of productivity in England from 1250 to 1870, with the goal of both dating the onset of growth and using that dating to discriminate between competing theories of why growth began.

Methodological Innovation. The core challenge is that real wages over this period were heavily distorted by Malthusian population dynamics. Plague-induced population collapses (most dramatically the Black Death of 1348, which killed roughly 25% of England’s population) drove enormous swings in real wages that reflect movements along a stable labor demand curve, not changes in productivity. A naive regression of wages on labor supply is therefore inconsistent, because in a Malthusian world productivity growth induces population growth, making labor supply endogenous to productivity.