Carolin Pflueger

Carolin Pflueger

Click here to edit subtitle

A Model of Politics and the Central Bank, with Wioletta Dziuda, 2020

We present a two-period model examining how the central bank and the elected executive jointly shape economic outcomes, political selection, and accountability of the executive. The central bank is apolitical, minimizing a quadratic per-period loss function in inflation and unemployment, and trading off inflation and unemployment along an expectational Phillips curve. The elected government's quality shifts unemployment for any given level of inflation. After observing first-period unemployment, fully rational voter-households optimally choose between the incumbent, whose quality remains constant, versus a challenger of unknown quality. This simple setup allows us to derive a rich set of conclusions. First, an inflation-averse central bank increases incumbency advantage, or the likelihood that below-average incumbents are reelected. As a result, incumbents prefer more inflation-averse central banks than the social planner, rationalizing the political success of inflation-targeting central banks in practice. Second, in contrast to models without political selection, by increasing incumbency advantage an inflation-averse central bank raises long-term unemployment and can lower unemployment variability. Third, the adverse unemployment effects of inflation-averse central banks are compounded when the incumbent must also exert costly effort.

A Finance-Integrated New Keynesian Model, with Gianluca Rinaldi, 2020

We integrate a standard New Keynesian model with financial asset prices through consumption-based habits. Finance habit preferences generate volatile stock returns from macroeconomic fundamentals, and plausible hedging properties of long-term bonds. The model sheds light on three empirical facts around monetary policy announcements. First, the model matches the large stock return response to Federal Funds rate surprises, but only if stock responses are amplified by consumption-based habit risk premia. Second, the relationship between breakeven inflation changes and stock returns around monetary policy dates is consistent with the effect of long-term inflation news. Third, if growth expectations respond to an increase in the short term monetary rate, flight-to-safety mitigates the direct increase in long-term real bond yields.

  Henry Angus 867 
Assistant Professor
University of Chicago
Harris School of Public Policy

NBER Faculty Research Fellow
CEPR Research Affiliate