Keith KUESTER 1

Address: European Central Bank Personal information:

Kaiserstr. 29
60311 Frankfurt, Germany date of birth: January 13, 1978
Email: keith_dot_kuester_at_e b_dot_int itizenship: German
Phone: +49 (69) 1344 7219 marital status: married

Resear h Interests
Ma roe onomi s and Monetary E onomi s, Labor E onomi s, Applied E ono-
metri s.

Current Position

sin e 09/2006 E onomist, Monetary Poli y Strategy Division, European Central Bank.

Edu ation
2001  2006 Dr. rer. pol (summa um laude), Goethe University Frankfurt, Germany.
Thesis title: The Role of Labor Markets in Monetary DSGE Models and Ro-
bust Monetary Poli y.
2000  2001 M.S . Finan ial E onomi s and E onometri s (with distin tion), University of
Essex, UK.
1999  2000 Study of E onomi s. University of Kiel and University of Bonn, Germany.
1997  1999 Vordiplom (B.S. E onomi s), University of Kiel, grade 1.0 (s ale from 0.7-5.0).

Publi ations
2006 Value-at-Risk Predi tion: A Comparison of Alternative Strategies , Journal of
Finan ial E onometri s 4(1), p. 5389, with S. Mittnik and M. Paolella.
2005 Optimal Monetary Poli y Rules for the Euro Area , Journal of Common Mar-
ket Studies, 43(3), p. 507537, with A. Dieppe and P. M Adam.

Working Papers

2007 Resus itating the Wage Channel in Models with Unemployment Flu tuations,
with K. Christoel. Prepared for Carnegie Ro hester Conferen e, Nov. 2007.
2007 The (Un)Importan e of Unemployment Flu tuations for Welfare, mimeo. Eu-
ropean Central Bank and University of Amsterdam, with P. Jung.
2007 Is the New Keynesian Phillips Curve Flat?, European Central Bank Working
Paper No. 809, with G. Mueller and S. Stoelting.
2006 Real Pri e and Wage Rigidities in a Model with Mat hing Fri tions, European
Central Bank Working Paper No. 720.
2006 Identifying the Role of Labor Markets for Monetary Poli y in an Estimated
DSGE Model, ECB Working Paper No. 635, with K. Christoel and T. Linzert.
2005 Insuran e Poli ies for Monetary Poli y in the Euro Area , ECB Working Paper
No. 480, with V. Wieland.

S holarships and Awards

2005 Conferen e Bursary, E onometri So iety World Congress, London.

2001  2004 German Resear h Foundation (DFG), Ph.D. s holarship (full funding).
2000  2001 German A ademi Ex hange Servi e (DAAD), M.S . grant (full funding).
1999  2001 German National A ademi Foundation (Studienstiftung), merit grant.
Keith KUESTER 2

Conferen e and Seminar Presentations

2007 Carnegie Ro hester Conferen e Labor Markets, Ma roe onomi Flu tuations,
and Monetary Poli y, Pittsburgh; Annual Meeting of the Verein für So ialpoli-
tik, Muni h; Conferen e New Challenges in E onomi Resear h, Louvain-la-
Neuve, Belgium; European E onomi Asso iation, Budapest; Conferen e Us-
ing E onomi Models to Make Poli y Re ommendations, San Sebastian, Spain;
North Ameri an Summer Meetings of the E onometri So iety, Duke Univer-
sity; Cze h National Bank, Prague.
2006 International Resear h Forum on Monetary Poli y, Federal Reserve Board,
Washington D.C.; European E onomi Asso iation, Vienna; So iety for E o-
nomi Dynami s, Van ouver; So iety for Computational E onomi s, Cyprus.
2005 Deuts he Bundesbank, Frankfurt; E onometri So iety World Congress, Lon-
don; So iety for Computational E onomi s, Washington D.C.
2004 Spring Meeting of Young E onomists, Warsaw.

Previous Employment and Tea hing

2004  2006 Resear h and tea hing assistant, Goethe University, Frankfurt.
(tea hing Ph.D. and third year ma roe onomi s lasses)
2005/Jan-Jun Resear h visitor, Deuts he Bundesbank, Frankfurt.
2002  2003 Intern (Graduate Resear h Program), European Central Bank (4 months).
1998  2000 Tea hing assistant (undergrad. linear algebra and statisti s), University of Kiel.

Referee A tivity

Journal of E onomi Dynami s and Control, Berkeley Press Ele troni Jour-
nals, S ottish Journal of Politi al E onomy.

Membership in Professional Organizations

E onometri So iety, European E onomi Asso iation, Verein für So ialpolitik.

Languages

German (mother tongue), English (uent), Spanish (good).

Frankfurt, O tober 18, 2007

Keith KUESTER 3

Abstra ts of Published Papers

Value-at-Risk Predi tion: A Comparison of Alternative Strategies , Journal of Fi-

nan ial E onometri s, 2006, 4(1), pp. 5389, with S. Mittnik and M. Paolella.

Given the growing need for managing nan ial risk, risk predi tion plays an in reasing role
in banking and nan e. In this study we ompare the out-of-sample performan e of existing
methods and some new models for predi ting value-at-risk (VaR) in a univariate ontext. Us-
ingmore than 30 years of the daily return data on the NASDAQ Composite Index, we nd that
most approa hes perform inadequately, although several models are a eptable under urrent
regulatory assessment rules for model adequa y. A hybrid method, ombining a heavy-tailed
generalized autoregressive onditionally heteroskedasti (GARCH) lter with an extreme value
theory-based approa h, performs best overall, losely followed by a variant on a ltered histor-
i al simulation, and a new model based on heteroskedasti mixture distributions. Conditional
autoregressive VaR (CAViaR) models perform inadequately, though an extension to a parti ular
CAViaR model is shown to outperform the others.

Optimal Monetary Poli y Rules for the Euro Area (2005), Journal of Common Market
Studies, 2005, 43(3), p. 507537, with A. Dieppe and P. M Adam.

In this arti le, we analyse the ondu t of optimal monetary poli y for the new euro area. The
aggregate euro area e onomy is modelled to have relatively sluggish adjustment properties and a
private se tor with mainly ba kward-looking expe tations. In this e onomy, we assume that the
entral bank sear hes for its best-performing monetary poli y rule, e.g. the optimal weight to give
to ination stabilization ompared to that of output, the optimal degree of forward-looking in
the planning horizon, and so on. We rst nd that the optimal degree of gradualism in interest
rate-setting needs only be relatively mild and that the entral bank should in orporate new
information qui kly into poli y-making. Se ond, there is substantial gain from implementing and
ommuni ating quite forward-looking poli ies. The optimal fore ast horizon for ination ranges
around six quarters. In ontrast to deliberately simple rule-based poli y re ommendations, fully
optimal poli y is a ompli ated response to many dierent e onomi indi ators. With regard
to this we nd, third, that optimal poli y should be based on a broad information set, even if
the resulting poli y framework is hard to ommuni ate to the outside world. Thus, the arti le
ontributes to the debate on optimal monetary poli y for the euro area, as well as to the ondu t
of monetary poli y in fa e of substantial persisten e in the transmission me hanism.
Keith KUESTER 4

Abstra ts of Working Papers

Resus itating the Wage Channel in Models with Unemployment Flu tuations
(2007), with K. Christoel.

Higher wages all else equal translate into higher ination. More rigid wage adjustment implies a
slower adjustment of pri es. This view of the wage hannel is deeply entren hed in many entral
banks' view of the labor market. In this paper, we present a model with equilibrium unem-
ployment whi h (a) features su h a proper wage hannel, whi h (b) reprodu es the u tuations
of unemployment over the business y le and whi h ( ) implies a reasonable (low) elasti ity of
steady state unemployment with respe t to hanges in benets. Sear h and mat hing models
featuring right-to-manage a ount for (a). We show that a small modi ation of these, namely
the introdu tion of a period-by-period xed ost asso iated with jobs, greatly magnies prot
u tuations for any given degree of wage u tuations, whi h gives (b). While the alibration still
relies on low prots, it does not ne essarily demand a small gap between the value of working
and the value of unemployment for the worker, whi h yields ( ).

The (Un)Importan e of Unemployment Flu tuations for Welfare (2007), with P. Jung.

This paper develops a New Keynesian model with mat hing fri tions and liquidity- onstrained
onsumers. We estimate the model on six ma roe onomi time-series using Bayesian te hniques
and provide an estimate for the welfare ost of endogenous unemployment risk. First, we nd
that Shimer's (2005) initial pessimism with respe t to the working of ma roe onomi labor
market sear h and mat hing models is unwarranted. The model repli ates the entire time-path
of unemployment rates almost perfe tly without having used this information in the estimation
pro ess. In terms of welfare we nd, se ond, that so iety as a whole would pay at least 0.2of
steady state onsumption to avoid business y le u tuations ompletely. These osts rise for
workers who have no means to self-insure themselves against u tuations and who an only
repla e part of their wage in ome when unemployed. At the extreme, with a repla ement rate
of only 10to avoid business y le risk. Of the full welfare ost of business y les for liquidity-
onstrained workers about a quarter to a half is due to the o-movement of unemployment risk
with the business y le.

Is the New Keynesian Phillips Curve at? (2007), with G. Müller and S. Stölting.

Ma roe onomi data suggest that the New Keynesian Phillips urve is quite at - despite mi roe-
onomi eviden e implying frequent pri e adjustments. While real rigidities may help to a ount
for the oni ting eviden e, we propose an alternative explanation: if pri e markup/ ost-push
sho ks are persistent and negatively orrelated with the labor share, the latter being a widely
used measure for marginal osts, the estimated pass-through of measured marginal osts into
ination is limited, even if pri es are fairly exible. Using a standard New Keynesian model, we
show that the GMM approa h to the New Keynesian Phillips urve leads to in onsistent and
upward biased estimates if ost-push sho ks indeed are persistent. Monte Carlo experiments
suggest that the bias is quite sizeable: we nd average pri e durations estimated as high as 12
quarters, when the true value is about 2 quarters. Moreover, alternative estimators appear to be
biased as well, while standard diagnosti tests fail to signal a misspe i ation of the model.
Keith KUESTER 5

Real Pri e and Wage Rigidities in a Model with Mat hing Fri tions (2007).

This paper in orporates a sear h and mat hing framework into the (Calvo-staggered) pri e setting
se tor. Mat hing fri tions lead pri e setting rms to negotiate wage rates with their employees.
The negotiation of wages substantially in reases strategi omplementarity in pri e setting among
suppliers of dierentiated goods. This leads to an in rease in real rigidities as in Woodford (2003)
whi h redu es implied pri e durations for a given estimate of the slope of the Phillips urve thus
re on iling ma ro- and mi ro-eviden e. A novel result of the paper is that the same fa tors whi h
indu e smooth ination also dampen the adjustment of wages in response to sho ks. In the sear h
and mat hing framework this is key for explaining the highly responsive nature of va an ies in
the data. Another interesting nding for the Phillips urve is that ination is not only driven by
an output gap but also by an employment gap - a feature usually negle ted in empiri al resear h.
The modied model mat hes impulse responses of an SVAR for post Vol ker-disination U.S.
data very well.

Identifying the Role of Labor Markets for Monetary Poli y in an Estimated DSGE
Model (2006), with K. Christoel and T. Linzert.

We fo us on a quantitative assessment of rigid labor markets in an environment of stable mone-

tary poli y. We ask how wages and labor market sho ks feed into the ination pro ess and derive
monetary poli y impli ations. Towards that aim, we stru turally model mat hing fri tions and
rigid wages in line with an optimizing rationale in a New Keynesian losed e onomy DSGE
model. We estimate the model using Bayesian te hniques for German data from the late 1970s
to present. Given the pre-euro heterogeneity in wage bargaining we take this as the rst-best
approximation at hand for modelling monetary poli y in the presen e of labor market fri tions
in the urrent European regime. In our framework, we nd that labor market stru ture is of
prime importan e for the evolution of the business y le, and for monetary poli y in parti ular.
Yet sho ks originating in the labor market itself may ontain only limited information for the
ondu t of stabilization poli y.

Insuran e Poli ies for Monetary Poli y in the Euro Area (2005), with V. Wieland.

In this paper, we examine the ost of insuran e against model un ertainty for the Euro area
onsidering four alternative referen e models, all of whi h are used for poli y-analysis at the
ECB. We nd that maximal insuran e a ross this model range in terms of a Minimax poli y
omes at moderate osts in terms of lower expe ted performan e. We extra t priors that would
rationalize the Minimax poli y from a Bayesian perspe tive. These priors indi ate that full
insuran e is strongly oriented towards the model with highest baseline losses. Furthermore, this
poli y is not as tolerant towards small perturbations of poli y parameters as the Bayesian poli y
rule. We propose to strike a ompromise and use preferen es for poli y design that allow for
intermediate degrees of ambiguity-aversion. These preferen es allow the spe i ation of priors
but also give extra weight to the worst un ertain out omes in a given ontext.