Publications

How should policymakers respond to the recent surge in inflation? This paper examines the impact of global supply chain pressures on euro area inflation and the implications for monetary policy. A Phillips curve analysis shows that global supply chain pressures contribute positively and significantly to inflation in the euro area. Furthermore, results from a Bayesian structural vector autoregressive model show that shocks to global supply chain pressures were the dominant driver of euro area inflation in 2022, and that these shocks have a highly persistent and hump-shaped impact on inflation. Finally, a two-country New Keynesian model with trade in intermediate goods shows that the optimal monetary policy response to global-supply-induced inflation is a non-linear function of the degree of global value chain participation.

Slides

Column at VoxEU

Presentation at Inflation: Drivers and Dynamics 2023 Conference (ECB)

We study the stabilization properties and welfare implications of a fiscal capacity in a New Keynesian model for a monetary union. A novel feature of the model is that access to the fiscal capacity is conditional on a country's public debt accumulation being sufficiently low. Likewise, the national fiscal effort to stabilize debt is more ambitious at higher debt levels. We show that the fiscal capacity reduces union-wide macroeconomic variability and raises union-wide welfare by reducing the incidence of regimes with large (pro-cyclical) fiscal consolidations. Welfare gains are higher under greater trade openness and price stickiness.

We find that past major pandemics have led to a significant decline in trend inflation in Europe that lasts for more than a decade. The effects of the COVID-19 pandemic on trend inflation could, however, be different this time around.

Column at VoxEU

Coverage by The Economist

In recent years, the relationship between wage growth and the unemployment gap, known as the wage Phillips curve, has been puzzlingly weak: whereas the unemployment gap was low, wage growth was low as well. We consider two possible explanations for this 'low wage growth puzzle': (i) a structural change in the relationship between wage growth and labor market slack, and (ii) a failure of the unemployment gap to adequately capture labor demand conditions. We propose a new measure for labor market slack based on a survey among firms asking whether the shortage of labor is limiting production. This labor shortage indicator points to hidden slack not captured by the unemployment gap, which resolves the low wage growth puzzle. Our estimates of the wage Phillips curve for the five biggest euro area countries also suggest that the wage Phillips curve has changed over time, but not uniformly across countries.

Slides

Article in Economische Statistische Berichten (Dutch)

Earlier studies on the equilibrium properties of standard dynamic macroeconomic models have shown that an inflation-targeting central bank imposes strict budgetary requirements on fiscal policy needed to obtain a unique and stable equilibrium. The failure of only one fiscal authority within a monetary union to meet these requirements already results in non-existence of equilibrium and an unstable monetary union. We show that such outcomes can be averted if fiscal authorities can make a credible commitment to switch to more sustainable fiscal regimes in the future. In addition, we illustrate how alternative policy measures, such as fiscal bailouts and debt monetization by the central bank, also broaden the range of policy stances under which monetary unions are stable.

Slides, poster

Article in Economische Statistische Berichten (Dutch)

Interview at the 2018 ASSA Annual Meeting

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investment, we find that only the former raise output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment. 

Slides, poster

Under monetary union, economic dynamics may diverge across countries due to regional inflation differentials and a pro-cyclical real interest rate channel, yet stability is generally ensured through endogenous adjustment of the real exchange rate. The speed of adjustment depends, inter alia, on the way agents form expectations. We propose a model in which agents’ expectations are largely based on domestic variables, and less so on foreign variables. We show that such home bias in expectations strengthens the real interest rate channel and causes country-specific shocks to generate larger and more prolonged macroeconomic imbalances.

Slides, poster

Article on centralbanking.com

In standard macroeconomic models, equilibrium stability and uniqueness require monetary policy to actively target inflation and fiscal policy to ensure long-run debt sustainability. We show analytically that these requirements change, and depend on the cyclicality of fiscal policy, when government debt is risky. In that case, budget deficits raise interest rates and crowd out consumption. Consequently, countercyclical fiscal policies reduce the parameter space supporting stable and unique equilibria and are feasible only if complemented with more aggressive debt consolidation and/or active monetary policy. Stability is more easily achieved, however, under pro-cyclical fiscal policies.