I am a Senior Economist in the Monetary and Financial Market Analysis section in the Division of Monetary Affairs at the Federal Reserve Board of Governors in Washington D.C. .

My fields of interest include production-based asset pricing, monetary economics, and the interaction of policy with financial markets. .

Email: Anthony.M.Diercks@frb.gov

The views expressed at this page are my own and do not indicate concurrence by other members of the research staff or the Board of Governors of the Federal Reserve System.

Research

Publications and Working Papers

News Shocks and Production-Based Term Structure of Equity Returns

With H. Ai and M. Croce and K. Li

Review of Financial Studies, 2018, Volume 31(7).
Lead Article (Editor's Choice)

Abstract: We propose a production-based general equilibrium model to study the link between timing of cash flows and expected returns, both in the cross-section of stocks and along the aggregate equity term structure. Our model incorporates long-run growth news with time-varying volatility and slow learning about the exposure that firms have with respect to these shocks. Our framework provides a unified explanation of the stylized features of the slope of the term structure of equity returns, its variations over the business cycle, and the negative relationship between cash-flow duration and expected returns in the cross-section of book-to-market-sorted portfolios.

The Equity Premium, Long-Run Risks to R-Star, and Asymmetric Optimal Monetary Policy

"Talk of the Town" Award

Finance Down Under Conference, 2016

"NYSE Euronext Capital Markets Best Paper Award"

EFMA, 2017

Abstract: With the Federal Reserve undergoing a serious review of its strategy, this paper provides a timely analysis that focuses on longer-run themes and monetary policy's potential influence. If we take the stance that asset prices indicate a high cost of exposure to long-run risks, this has very interesting implications for monetary policy that ripple through a surprisingly broad set of dimensions. There is an intuitive result that a Ramsey planner might wish to attenuate long-run risks (a key contributor to shifts in r-star). Less intuitively, I show that a Ramsey policymaker will induce a tolerance for skewness and a higher average inflation rate than is typically advocated in the literature. A variety of factors contribute to these results. First, deep non-linearities in the model entail that the policymaker behaves asymmetrically in its countercyclical policies. Second, the presence of capital generates longer-run effects (hysteresis) and additional tradeoffs, which implies that ``countercyclical" in this model takes on a lower frequency theme. And third, imperfect competition leads to the pursuit of a higher average inflation rate to offset the related welfare costs.

The analysis and conclusions set forth in this paper are those of the author and do not indicate concurrence by other members of the research staff or the Board of Governors of the Federal Reserve System.

Taxes and the Fed:
Theory and Evidence from Equities

FEDS Working Paper Series
With W. Waller

Option to Resubmit to Review of Financial Studies

Media Coverage: Bloomberg, The Wall Street Journal, MarketWatch

Abstract: Conventional wisdom suggests tax cuts are associated with higher stock market returns. We provide a critical theoretical and empirical analysis that suggests a key driver of fiscal effects on equity markets is the Federal Reserve through the risk premium channel. For the Post-1980 era, tax cuts lead to higher cash flow news and higher discount rates. The discount rate news (primarily risk premia) tends to dominate such that tax cuts are associated with lower equity returns. For the Pre-1980 era, the results flip. This empirical instability is confirmed across multiple measures of tax shocks at different frequencies. We show that these responses are consistent with a standard New Keynesian model that exhibits a shift in the aggressiveness of monetary policy. Moreover, these effects generate a large risk premium response to tax cuts consistent with the presence of a financial accelerator.

The analysis and conclusions set forth in this paper are those of the author and do not indicate concurrence by other members of the research staff or the Board of Governors of the Federal Reserve System.

When It Rains It Pours: Cascading Uncertainty Shocks

With A. Hsu and A. Tamoni

SITE 2019

Abstract: Uncertainty shocks can be self-reinforcing. We empirically document that serial uncertainty shocks are (1) common in the data and (2) have an increasingly stronger impact on the macroeconomy. In other words, a series of bad (positive) uncertainty shocks exacerbates the economic decline significantly. We then generate the cascading effect of uncertainty shocks in a standard DSGE model. Related to this finding is the non-linear scaling effect of larger positive uncertainty shocks. As the size of the positive shock doubles, the macroeconomic response more than doubles. Standard theoretical models solved under third order perturbation cannot generate these empirical results: a fourth order perturbation solution is crucial.

A Simple Macro-Finance Measure of Risk Premia in Fed Funds Futures

With U. Carl and I. Munir (FEDS Note)

A Daily-Updated Risk-Adjusted Path of Policy:

ThePolicyPath.com

Media Coverage: The Grumpy Economist

Cited by Goldman Sachs (June 18, 2019)

Slides

Abstract: Existing measures of risk premiums for near-term policy expectations typically suffer from issues of mean reversion, a reliance on surveys, and a lack of economic foundations. We address each of these concerns with a novel parsimonious macro-finance measure of risk premiums that is motivated by economic theory. We use rolling covariances between real and nominal activity in a regression framework, combined with model averaging, to uncover intuitive dynamics in the risk premium. When compared to surveys, market-based measures, and existing term structure estimates, we find that our measure provides superior out-of-sample forecast errors of the federal funds rate.

The Reader's Guide to Optimal Monetary Policy

Link to New Interactive
Visualization Application

Media Coverage: The Wall Street Journal, The Grumpy Economist, Monetary Policy in a New Era, The Brookings Institute: Should the Fed Stick with the 2 percent inflation target or rethink it?

Abstract: Recently, multiple economists have banded together to suggest to the Federal Reserve that the inflation target needs to be changed. The inflation target is the core through which monetary policy makers rationalize their decisions while following the dual mandate of maximum employment and price stability. Understanding the rationale for its level, 2%, and understanding the academic literature related to optimal inflation dynamics seems more important than ever before. This survey takes into account every optimal monetary policy paper made available to the public since the mid-1990s and provides a careful discussion on the most important costs and benefits of inflation.