Research

On the Identification of Unfunded Fiscal Shocks with Risk-Neutral Expectation Premium, with Stefano Fasani (Lancaster University), Andrea Fratini (Sapienza), Lorenza Rossi (Lancaster University)

Abstract: This paper proposes a novel strategy to identify funded and unfunded fiscal shocks in a Bayesian Structural VAR. Using a structural macro-finance framework, we show that although the two shocks may generate similar responses in inflation, output, and fiscal deficits, they imply opposite signs of the risk-neutral expectation premium (REP). We use these model-implied sign restrictions to identify fiscal shocks in U.S. data. Unfunded shocks account for a substantial share of inflationary episodes, particularly around the COVID-19 fiscal packages. The identified funded and unfunded fiscal shocks align closely with major historical episodes from the 1970s to the post-COVID period, for which we provide a narrative interpretation.

The Insurance Value of Transfers across the Business Cycle, with Dario Bonciani (Sapienza) and Andrea Fratini (Sapienza)

Abstract: How does inequality risk shape the effectiveness of fiscal transfers over the business cycle? We address this question through the lens of a medium-scale heterogeneous-agent New Keynesian model in which households face uninsurable transitions between saver and hand-to-mouth status. In this environment, fiscal transfers provide both redistribution and insurance against idiosyncratic income risk, as they reduce precautionary saving motives and strengthen the aggregate demand response. When income risk is low, state dependence is limited and transfer multipliers remain broadly similar across recessions and expansions. However, state dependence becomes more pronounced as the probability of transitioning from saver to hand-to-mouth status increases. In particular, as the probability of becoming hand-to-mouth rises, transfer multipliers become larger and their cyclicality strengthens, reflecting the greater insurance value of transfers and positive general equilibrium spillovers across household groups.

Belief Distortions and Uncertainty about Inflation, with Stefano Fasani (Lancaster University), Lorenza Rossi (Lancaster University), and Giuseppe Pagano Giorgianni (Sapienza). SLIDES.  R&R at Journal of Political Economy: Macroeconomics

Abstract: This paper studies the macroeconomic effects of an inflation belief shock—an unexpected increase in household inflation expectations relative to a full-information rational forecast. We identify the shock using machine-learning methods applied to U.S. survey data and a large set of news, macroeconomic, global, and financial variables. In normal times, the shock raises inflation while reducing consumption and increasing unemployment. At the zero lower bound, it lowers real interest rates, boosts consumption, and reduces unemployment. Inflation uncertainty rises in both regimes, dampening the expansionary effects at the ZLB. A theoretical model replicates these findings, highlighting the need for monetary policy to stabilize both inflation beliefs and uncertainty about inflation.

• Climate Change Uncertainty and the Cross-Section of Green and Brown Returns, with G. Curatola (University of Siena), M. Donadelli (University of Brescia), I. Gufler (LUISS), M. Z. Ammar (Sapienza). R&R at International Review of Financial Analysis

Abstract: We examine whether climate uncertainty is consistently priced in the cross-section of brown and green equity portfolio returns. We employ multiple climate uncertainty proxies -- based on media coverage, policy uncertainty, social attention, and Google search trends -- and estimate risk premia across portfolios classified by ESG scores, carbon intensity, and sectoral transition exposure. The estimated premia vary in both sign and size across climate uncertainty proxies, with no consistent pricing differentials between green and brown assets and limited evidence of a conditional time structure. Mimicking portfolio tests highlight the proxy-dependent nature of climate risk in asset pricing.