Alp Simsek

Recent working papers

• Forward Guidance and Financial Conditions

  with Ricardo Caballero·2026

  Earlier policy-oriented version: FCI-plot: Central Bank Communication Through Financial Conditions, presented at the 2nd Thomas Laubach Research Conference at the Federal Reserve Board.

  PDFFCI-plotNBER wp 34325
  Abstract

  Forward guidance has recently been contested, most visibly in the United States. We investigate its benefits and costs in a model in which monetary policy reaches the economy through financial conditions. Noisy flows move those conditions, and because the central bank adjusts its interest rate gradually, they open output gaps. Arbitrageurs trade against the noise but do not fully offset it, because they are uncertain about policy. Guidance resolves the central bank's view of future demand, which lowers that uncertainty and recruits the arbitrageurs to absorb more of the noise. But the announcement also moves financial conditions today, even though the level the central bank wants today has not changed. The optimal guidance intensity balances these forces. It rises with the amount of noise, with policy uncertainty, and with the persistence of the central bank's view. We then compare interest rate guidance with financial conditions guidance. A projected interest rate embeds the central bank's view of the risk premium alongside its view of the economy, so for a given communication effort it conveys less. Financial conditions guidance can always attain the optimal guidance intensity, whereas interest rate guidance attains it only when guidance is not particularly valuable. Even when both attain it, interest rate guidance requires more communication effort. How much a central bank must say therefore depends on what it talks about.

• Exchange Rate Stabilization and Monetary Transmission

  with Paul Fontanier·2026

  PDF
  Abstract

  Conventional wisdom, rooted in the Mundellian trilemma, holds that exchange rate stabilization constrains monetary policy. We challenge this view for emerging markets with shallow financial markets. Across 16 emerging economies, we document that the pass-through from policy rates to market interest rates is strongest at intermediate levels of exchange rate volatility, and weaker under both free floats and hard pegs—an inverted-U pattern. We rationalize it with a model of segmented financial markets in which binding risk limits make domestic arbitrage demand inelastic. We show that this inelasticity weakens the transmission of policy rates to market interest rates. Exchange rate stability attracts foreign investment in local currency assets, which absorbs risk, relaxes the limits, and makes arbitrage demand more elastic. This strengthens transmission and gives the central bank better control over the output gap. Starting from a pure output-gap rule, it is always optimal to introduce some exchange rate stabilization. However, excessive stabilization, such as a hard peg, can backfire by raising policy rate volatility and increasing the risk borne by arbitrageurs.

• FCI-star

  with Ricardo Caballero and Tomas Caravello·2026

  PDFNBER wp 33952
  Abstract

  Central banks rely on r*—the neutral interest rate—to assess policy stance. However, monetary policy affects activity through broad financial conditions, not only the short-term rate. We propose FCI*, the neutral level of a financial conditions index consistent with output at potential. Unlike r*, FCI* is insulated from financial fluctuations: when asset prices move, FCI captures their estimated effect on output, leaving FCI* to reflect only what the macroeconomy requires. In U.S. data, r* co-moves with the equity premium; FCI* does not. FCI gaps provide useful real-time guidance on policy stance, especially when financial conditions diverge from the policy rate.

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