Working papers

Climate-Conscious Monetary Policy (with A. Nakov), June 2023

We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transition to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds' spreads.

The term structure of interest rates in a heterogeneous monetary union (with J. Costain and G. Nuño), June 2022

The highly asymmetric reaction of euro area yield curves to the announcement of the ECB's pandemic emergency purchase programme (PEPP) is hard to reconcile with the standard "duration risk extraction" view of the transmission of central banks' asset purchase policies. This observation motivates us to build a no-arbitrage model of the term structure of sovereign interest rates in a two-country monetary union, in which one country issues default-free bonds and the other issues defaultable bonds. We derive an affine term structure solution, and we decompose yields into term premium and credit risk components. In an extension, we endogenise the peripheral default probability, showing that the possibility of rollover crises makes it an increasing function of bond supply net of central bank holdings. We calibrate the model to Germany and Italy, showing that it matches well the reaction of these countries' yield curves to the PEPP announcement. A channel we call "default risk extraction" accounts for most of the impact on Italian yields. The programme's flexible design substantially enhanced this impact.

Old working papers:  

Employment fluctuations in a dual labor market (with J. S. Costain and J. F. Jimeno), April 2010.

In light of the huge cross-country differences in job losses during the recent crisis, we study how labor market duality – meaning the coexistence of “temporary” contracts with low firing costs and “permanent” contracts with high firing costs – affects labor market volatility. In a model of job creation and destruction based on Mortensen and Pissarides (1994), we show that a labor market with these two contract types is more volatile than an otherwise identical economy with a single contract type. Calibrating our model to Spain, we find that unemployment fluctuates 21% more under duality than it would in a unified economy with the same average firing cost, and 33% more than it would in a unified economy with the same average unemployment rate. In our setup, employment grows gradually in booms, due to matching frictions, whereas the onset of a recession causes a burst of firing of “fragile” low-productivity jobs. Unlike permanent jobs, some newly-created temporary jobs are already near the firing margin, which makes temporary jobs more likely to be fragile and means they play a disproportionate role in employment fluctuations. Unifying the labor market makes all jobs behave more like the permanent component of the dual economy, and therefore decreases volatility. Unfortunately, it also raises unemployment; to avoid this, unification must be accompanied by a decrease in the average level of firing costs. Finally, we confirm that factors like unemployment benefits and wage rigidity also have a large, interacting effect on labor market volatility; in particular, higher unemployment benefits increase the impact of duality on volatility.

"Firing costs, labor market search and the business cycle", January 2006.

This paper finds that firing costs decrease the volatility of business cycle fluctuations in the search and matching model of the labor market. It thus provides a possible explanation for the evidence that countries with higher levels of employment protection tend to have lower employment and output volatility. In addition, it shows how firing costs can solve a major pitfall of the standard model, namely its failure to generate a negative correlation between the cyclical components of unemployment and vacancies.