Welcome

I'm Anton Nakov, Economist at ECB and CEPR Fellow. Please, scroll down to find my research and policy papers.

Work in Progress

Optimal Monetary Policy with r*<0 (with Roberto Billi and Jordi Galí). Appendix

Rational Inattention and Retail Price Dynamics (with James Costain and Federico Rodari)

Optimal Inflation with Firm Level Shocks (with Henning Weber)

Contact

Email address: anton.nakov@gmail.com

Curriculum Vitae

Here you can view my short Bio

Download my full CV in pdf

Replication Codes

You can find the codes for most of my papers on GitHub: https://github.com/anakov

Research Papers

Flattening of the Phillips curve with state-dependent prices and wages

Economic Journal. February 2022. Joint with James Costain and Borja Petit

We study monetary transmission in a model of state-dependent prices and wages based on “control costs“. Stickiness arises because precise choice is costly: decision-makers tolerate errors both in the timing of adjustments, and in the new level at which the price or wage is set. The model is calibrated to microdata on the size and frequency of price and wage changes. In our simulations, money shocks have less persistent real effects than in the Calvo framework; nonetheless, the model exhibits a substantial degree of non-neutrality, driven mainly by wage rigidity. State-dependent nominal stickiness implies a flatter Phillips curve as trend inflation declines because price and wage adjustments become less frequent, making short-run inflation less reactive to shocks. Our model can explain almost half of the observed decline in the slope of the Phillips Curve since 2000.

Effectiveness and addictiveness of quantitative easing

Journal of Monetary Economics. January 2021. Joint with Peter Karadi

This paper analyzes optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks’ capital position. It warns, however, that the policy can remain ineffective after non-financial shocks and might offer no substitute for interest rate policy when the latter is constrained by the lower bound. Furthermore, the asset-purchase policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector, and therefore slows down its recapitalization. Consequently, the optimal exit from large central bank balance sheets is gradual.

Logit price dynamics

Journal of Money, Credit and Banking. February 2019. Joint with James Costain

We model retail price stickiness as the result of costly, error-prone decision making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro facts related to the size of price changes, the behavior of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the “selection effect.” Allowing for both types of errors also helps explain how trend inflation affects price adjustment.

Precautionary price stickiness

Journal of Economic Dynamics and Control. September 2015. Joint with James Costain

This paper proposes a model in which retail prices are sticky even though firms can always change their prices at zero cost. Instead of imposing a “menu cost”, we assume that more precise decisions are more costly. In equilibrium, firms optimally make some errors in price-setting, thus economizing on managerial time. Both the time cost of choice, and the resulting risk of errors, give firms an incentive to leave their prices unchanged until they perceive a sufficiently costly deviation from the optimal price. We show that this error-prone “control cost” framework helps explain many puzzling observations from microdata. However, on the macroeconomic side, pricing errors do little to explain the real effects of monetary shocks.

Learning from experience in the stock market

Journal of Economic Dynamics and Control. March 2015. Joint with Galo Nuño

New evidence suggests that individuals “learn from experience,” meaning they learn from events occurring during their lives as opposed to the entire history of events. Moreover, they weigh more heavily recent events compared to events occurring in the distant past. This paper analyzes the implications of such learning for stock pricing in a model with finitely lived agents. Individuals learn about the rate of change of the stock price and of dividends using a weighted decreasing-gain algorithm. As a result of waves of optimism and pessimism, the stock price exhibits stochastic fluctuations around the rational expectations equilibrium. Conditional on the historical path of dividends, the model produces a price–dividend ratio which is in line with the evidence for the last century, except for the “dot-com” bubble in the 1990s.

Optimal monetary policy with state-dependent pricing

International Journal of Central Banking. September 2014. Joint with Carlos Thomas

This paper studies optimal monetary policy from the timeless perspective in a general model of state-dependent pricing. Firms are modeled as monopolistic competitors subject to idiosyncratic menu cost shocks. We find that, under certain conditions, a policy of zero inflation is optimal both in the long run and in response to aggregate shocks. Key to this finding is an "envelope" property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms' profits and hence on their probability of repricing. We offer an analytic solution that does not require local approximation or efficiency of the steady state. Under more general conditions, we show numerically that the optimal commitment policy remains very close to strict inflation targeting.

Saudi Arabia and the oil market

Economic Journal. December 2013. Joint with Galo Nuño

In this study, we document two features that have made Saudi Arabia different from other oil producers. First, it has typically maintained ample spare capacity. Second, its production has been quite volatile even though it has witnessed few domestic shocks. These features can be rationalised in a general equilibrium model in which the oil market is modelled as a dominant producer with a competitive fringe. We show that the net welfare effect of oil tariffs on consumers is null. The reason is that Saudi Arabia’s monopolistic rents fall entirely on fringe producers.

Distributional dynamics under smoothly state-dependent pricing

Journal of Monetary Economics. November 2011. Joint with James Costain

Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate.

Price adjustments in a general model of state-dependent pricing

Journal of Money, Credit and Banking. April 2011. Joint with James Costain

We study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable. Our setup nests Calvo (1983) at one extreme and a fixed menu cost model at the other; all parameterizations are ranked by a measure of state dependence. High state dependence implies, counterfactually, that there are no small price changes and that the variance of price changes falls sharply with trend inflation. The parameterization that best fits microdata has low state dependence, implying a Phillips curve coefficient 60% as large as that of the Calvo model, but is nonetheless well behaved at high inflation rates.

Monetary policy trade-offs with a dominant oil producer

Journal of Money, Credit and Banking. February 2010. Joint with Andrea Pescatori

We model oil production decisions from optimizing principles rather than assuming exogenous oil price shocks and show that the presence of a dominant oil producer leads to sizable static and dynamic distortions of the production process. Under our calibration, the static distortion costs the U.S. around 1.6% of GDP per year. In addition, the dynamic distortion, reflected in inefficient fluctuations of the oil price markup, generates a trade-off between stabilizing inflation and aligning output with its efficient level. Our model is a step away from discussing the effects of exogenous oil price variations and toward analyzing the implications of the underlying shocks that cause oil prices to change in the first place.

Oil and the Great Moderation

Economic Journal. March 2010. Joint with Andrea Pescatori

We assess the extent to which the greater US macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil elasticity of gross output. We estimate a DSGE model and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: smaller (non-oil) real shocks and better monetary policy. We find that oil played an important role in the stabilisation. Around half of the reduced volatility of inflation is explained by better monetary policy alone, and 57% of the reduced volatility of GDP growth is attributed to smaller TFP shocks. Oil related effects explain around a third.

Jackknife instrumental variables estimation: replication and extension of Angrist, Imbens, and Krueger

Journal of Applied Econometrics. October 2010

I replicate most of the results in Angrist, Imbens, and Krueger (Journal of Applied Econometrics 1999; 14: 57–67), point to a possible error in and re-estimate Model 3, and analyze some simple extensions.

Monetary effects on nominal oil prices

North American Journal of Economics and Finance. September 2009. Joint with Max Gillman

The paper presents a theory of nominal asset prices for competitively owned oil. Focusing on monetary effects, with flexible oil prices the US dollar oil price should follow the aggregate US price level. But with rigid nominal oil prices, the nominal oil price jumps proportionally to nominal interest rate increases. We find evidence for structural breaks in the nominal oil price that are used to illustrate the theory of oil price jumps. The evidence also indicates strong Granger causality of the oil price by US inflation as is consistent with the theory.

Optimal and simple monetary policy rules with zero floor on the nominal interest rate

International Journal of Central Banking. June 2008

Recent treatments of the issue of a zero floor on nominal interest rates have been subject to some important methodological limitations. These include the assumption of perfect foresight or the introduction of the zero lower bound as an initial condition or a constraint on the variance of the interest rate, rather than an occasionally binding non-negativity constraint. This paper addresses these issues, offering a global solution to a standard dynamic stochastic sticky-price model with an explicit occasionally binding non-negativity constraint on the nominal interest rate. It turns out that the dynamics and sometimes the unconditional means of the nominal rate, inflation, and the output gap are strongly affected by uncertainty in the presence of the zero lower bound. Commitment to the optimal rule reduces unconditional welfare losses to around one-tenth of those achievable under discretionary policy, while constant price-level targeting delivers losses that are only 60 percent larger than those under the optimal rule. Even though the unconditional performance of simple instrument rules is almost unaffected by the presence of the zero lower bound, conditional on a strong deflationary shock, simple instrument rules perform substantially worse than the optimal policy.

Granger causality of the inflation-growth mirror in accession countries

The Economics of Transition. December 2004. Joint with Max Gillman

The paper presents a model in which the exogenous money supply causes changes in the inflation rate and the output growth rate. While inflation and growth rate changes occur simultaneously, the inflation acts as a tax on the return to human capital and in this sense induces the growth rate decrease. Shifts in the model's credit sector productivity cause shifts in the income velocity of money that can break the otherwise stable relationship between money, inflation, and output growth. Applied to two accession countries, Hungary and Poland, a VAR system is estimated for each that incorporates endogenously determined multiple structural breaks. Results indicate Granger causality positively from money to inflation and negatively from inflation to growth for both Hungary and Poland, as suggested by the model, although there is some feedback to money for Poland. Three structural breaks are found for each country that are linked to changes in velocity trends, and to the breaks found in the other country.

A revised Tobin effect from inflation: relative input price and capital ratio realignments

Economica. August 2003. Joint with Max Gillman

The paper studies the realignments induced by inflation within an endogenous growth monetary economy. Accelerating inflation raises the ratio of the real wage to the real interest rate, and so raises the use of physical capital relative to human capital across all sectors. We find cointegration evidence for the US and UK economies consistent with a general equilibrium, Tobin-type, effect of inflation on input prices and capital intensity, even while the growth rate of output is reduced by inflation.

Policy Papers

The role of financial stability considerations in monetary policy in the euro area
ECB Occasional Paper. September 2021. With Albertazzi et al

Employment and the conduct of monetary policy in the euro area
ECB Occasional Paper. September 2021.
With Brand et al

Digitalisation: channels, impacts and implications for monetary policy in the euro area
ECB Occasional Paper
. September 2021. With Anderton et al

Price and wage setting when accurate decisions are costly: Implications for monetary policy transmission
Vox CEPR column.
June 2019. With James Costain

More, and more forward-looking: Central bank communication after the crisis In "Hawks and Doves: Deeds and Words"
February 2018. With Coenen et al

Communication of monetary policy in unconventional times
ECB Discussion Paper. June 2017.
With Coenen et al

Errors as a source of macroeconomic frictions
Vox CEPR column. October 2015.
With James Costain

Energy markets and the euro area macroeconomy
ECB Occasional Paper. June 2010.
With Task Force of the ESCB

Un modelo sencillo de las causas y consecuencias de las variaciones en el precio del petróleo
Boletín Económico del Banco de España. February 2010.
With Galo Nuño

Las finanzas de los hogares y la macroeconomía
Boletín Económico del Banco de España. December 2009.
With Ernesto Villanueva

Una modelización de equilibrio general de las fluctuaciones del precio del petróleo
Boletín Económico del Banco de España. January 2008

Disclaimer

All material found on this website is my own responsibility. It does not represent the views of my current or former employers.