Research

NEW!! Smooth Diagnostic Beliefs in Uncertain Leverage Cycles, with Andrea Fratini (Sapienza University Rome). 

Abstract: When financial frictions constrain agents’ ability to insure against shocks, uncertainty becomes a key propagation mechanism. We develop a small open economy model with collateral constraints and Smooth Diagnostic Expectations (SDE), a belief formation process that endogenously amplifies fluctuations through state- and history-dependent forecast revisions. Cali- brated to survey and macro-financial data, the model generates an uncertainty-driven amplification channel with first-order effects on the Fisherian debt–price spiral. Uncertainty in SDE expectations produces endogenous shifts in optimism and borrowing behavior, raising crisis risk and triggering feedback loops between belief distortions, asset prices, and borrowing limits. Relative to rational expectations, the resulting equilibrium features higher crisis frequency, deeper contractions, and stronger asymmetries between expansions and recessions.

NEW!!!   Belief Distortions and Uncertainty about Inflation, with Stefano Fasani (Lancaster University), Lorenza Rossi (Lancaster University), and Giuseppe Pagano Giorgianni (Sapienza). SLIDES

Abstract: This paper studies the macroeconomic effects of a belief distortion shock—defined as the unexpected component of household inflation expectations after accounting for professional forecasts and observable fundamentals. Using survey data, U.S. macroeconomic variables, and machine-learning methods, we identify this shock and examine its effects both within and outside the zero lower bound (ZLB), conditioning on household inflation uncertainty. The shock raises inflation, uncertainty, and unemployment in normal times. At the ZLB, the shock reduces real interest rates and becomes expansionary; however, the accompanying rise in inflation uncertainty dampens or can even reverse these effects. A New Keynesian model with belief shocks replicates these dynamics and matches the empirical patterns of inflation uncertainty.

• Ambiguity in Pricing Climate Uncertainty, with G. Curatola (University of Siena), M. Donadelli (University of Brescia), I. Gufler (LUISS), M. Z. Ammar (Sapienza)

Abstract: We examine whether climate change uncertainty (CCU) is systematically priced in the cross-section of equity returns by applying a two-stage Fama-MacBeth estimation within a unified empirical framework. Drawing on four distinct CCU proxies —derived from media coverage, policy uncertainty, social attention, and search trends— we assess CCU premia across Fama-French and green–brown portfolios (classified by ESG scores, carbon intensity, and sectoral exposure). We find that CCU shocks command significant risk premia; however, their size and sign depend critically on the proxy and classification scheme used. No consistent pricing differentials emerge between green and brown portfolios. Indeed, we observe substantial overlap in estimated CCU exposures and limited evidence of conditional systematic time structure, highlighting the inherently ambiguous nature of climate risk in financial markets. Mimicking portfolio strategies confirm these results.

• Monetary/fiscal policy regimes in post-war Europe, with O. Bouabdallah (European Central Bank), and P. Jacquinot (European Central Bank). ECB Working Paper Series (2024), 2871  SLIDES. Also in ECB Occasional Paper Series No 337  R & R

Abstract: In most euro area countries, the monetary/fiscal policy mix is responsible for the changing history of debt and inflation facts. Using a Dynamic Stochastic General Equilibrium model with Markov-switching policy rules, we identify three distinct monetary/fiscal regimes in France and Italy: a Passive Monetary-Active Fiscal regime (PM/AF) before the late 80s/early 90s; an Active Monetary-Passive Fiscal regime (AM/PF) with central bank in- dependence and EMU convergence; a third regime with policy rates at the effective lower bound combined with fiscal active behaviour to sustain the recovery. Our simulations reveal that the PM/AF regime in France led to price volatility and debt stabilisation, while the AM/PF regime resulted in disinflation and rising debt trajectory. Meanwhile, Italy’s procyclical fiscal policy in downturns contributed to persisting imbalances, high aggregate volatility, and low growth.