Research
Latest Publications and Working papers
The Trade-offs of Inclusive Monetary Policies joint with Carl Walsh, UPCOMING
What are the implications for the aggregate economy of monetary policies ensuring business cycle expansions benefit all segments of the labor markets? We provide a welfare assessment.
Worker heterogeneity, selection and unemployment dynamics in a pandemic joint with Carl Walsh, Journal of Money, Credit and Banking, 54:s1, February 2022 Appendix
We employ a new Keynesian model with search and matching frictions in the labor market, combined with a simple model of worker heterogeneity, to show how heterogeneity has important implications for the response of employment, hours, and wages in the face of severe contractionary shocks. We focus on the role of selection in both job separations and hiring that lead to differential impacts of recessionary shocks across workers and we show that recessions disproportionately impact low-productivity workers.
Uncertainty, Wages, and the Business Cycle joint with Matteo Cacciatore, Economic Journal, 131(639), October 2021 Appendix
We show that occasional deviations from efficient wage setting generate strong and state-dependent amplification of exogenous uncertainty shocks and can explain the cyclical behavior of empirical measures of uncertainty. Additionally, the variance of the unforecastable component of future economic outcomes always increases at times of low economic activity. Thus, measured uncertainty rises in a recession even in the absence of uncertainty shocks.
The Impact of Pessimistic Expectations on the Effects of COVID-19-Induced Uncertainty in the Euro Area joint with Giovanni Pellegrino and Gabriel Züllig, Oxford Bulletin of Economics and Statistics, 4-83, August 2021 Appendix
The impact of uncertainty shocks in the Euro area is much larger during periods of negative outlook for the future of the economy. We estimate the impact on industrial production of the current COVID-19 induced uncertainty to peak at a year-over-year growth loss of -15.4%, and to lead to a fall in CPI inflation between 1% and 1.5%. Policies providing state-contingent scenarios ready to be adopted if the worst-case outcomes materialize can reduce the impact of uncertainty.
Everyday Reference Prices, joint with Nicoletta Berardi and Mario Samano (draft coming soon)
We study price-setting behaviour using a unique European supermarket scanner-price dataset for a retailer which never adopts temporary sales. Prices are very sticky, with a median duration of 12 months and with over a quarter of all prices never changing over a 5-year period. The pricing behaviour is heterogeneous across items: 10% of the items sold amount to 60% of the revenue, and their price responds strongly to demand shifts.
Loan Securitization, Information Asymmetry and the Impact of Monetary Policy joint with Bart Hobijn
We study the implications for the business cycle and monetary policy of loan securitization in a DSGE model where information asymmetries lead to adverse selection across financial intermediaries. Securitization is an equilibrium outcome when the resources saved by acquiring incomplete information about some risk-classes of borrowers outweigh the cost of being selected against by mortgage originators. Securitization allows more efficient funding of loans, at the expense of increased volatility in risky interest rates, consumption, and inflation over the business cycle.
Publications
joint with Marcus Mølbak Ingholt, Canadian Journal of Economics, 54(1), February 2021
Working paper draft If you find the DSGE model implies an excessive number of restrictions on the estimation, the working paper draft reports results for a ML estimation including measurement errors over the pre-Great Recession sample.
The B.E. Journal of Macroeconomics, Vol 16(2), June 2015
joint with Giovanni Lombardo, Journal of International Economics, Vol 93(1), May 2014
Additional material: Appendix
joint with Nicolas Vincent, Economic Letters - Vol. 123 N.2, May 2014
joint with Carl Walsh, Journal of Money, Credit and Banking, Vol. 44:s2, 31-71, December 2012
joint with Carl Walsh, Journal of Monetary Economics, Vol 59(2), March 2012
The Size of the Tradable and Non-tradable Sector: Evidence from Input-output Tables for 25 Countries
joint with Giovanni Lombardo, Economics Letters, 116, September 2012
Macroeconomic Dynamics, Vol. 16(2), April 2012
Long working paper version: The Euro as a Commitment Device for New EU Member States
Economic Letters, Vol. 114(3), March 2012
joint with Carl Walsh, American Economic Journal: Macroeconomics, Vol 3(2), April 2011
References to the paper in the press: Washington Post, Reuters, Forbes, Bloomberg
joint with Fabio Natalucci, Journal of Money, Credit and Banking, Vol. 40, n. 2-3, March/April 2008
joint with Carl Walsh, European Economic Review, Vol. 52, November 2008
joint with Richard Dennis, Journal of Economic Dynamics and Controls, Vol. 32 n. 6, June 2008
Journal of Monetary Economics, Vol. 54 N. 7, October 2007
joint with Bart Hobijn and Andrea Tambalotti, Quarterly Journal of Economics, 121:3, August 2006
Comments on the Italian press: La Stampa, Il Messaggero, Italia Oggi, Il Mattino, La Sicilia, La Gazzetta Del Sud, Wall Street Italia, Il Denaro, Greenplanet
joint with Carl Walsh, Journal of Monetary Economics, Vol. 53 n. 2, March 2006
Technical Appendix Extended Working Paper version: The Cost Channel in a New Keynesian Model: Evidence and Implications
Other working papers
Monetary Policy and Rejections of the Expectations Hypothesis joint with Juha Seppala
We study the rejection of the expectations hypothesis within a New Keynesian business cycle model. According to Backus, Gregory, and Zin (1989), the Lucas general equilibrium asset pricing model can account for neither sign nor magnitude of average risk premia in forward prices, and is unable to explain rejection of the expectations hypothesis. We show that a New Keynesian model with habit-formation preferences and a monetary policy feedback rule produces an upward-sloping average term structure of interest rates, procyclical interest rates, and countercyclical term spreads. In the model, as in U.S. data, inverted term structure predicts recessions. Most importantly, a New Keynesian model is able to account for rejections of the expectations hypothesis. Contrary to Buraschi and Jiltsov (2005), we identify systematic monetary policy as a key factor behind this result. Rejection of the expectation hypothesis can be entirely explained by the volatility of just two real shocks which affect technology and preferences.
Monetary Policy, Expected Inflation and Inflation Risk Premia joint with Juha Seppala
We study variables that are normally unobservable, but very important for the conduct of monetary policy, expected inflation and inflation risk premia, within a New Keynesian business cycle model. We solve the model using a third-order approximation which allows us to study time-varying risk premia. Our model is consistent with rejection of the expectations hypothesis and the business-cycle behavior of nominal interest rates in the U.S. data. We find that inflation risk premia are very small and display little volatility. Hence, monetary policy authorities can use the difference between nominal and real interest rates from index-linked bonds as a proxy for inflation expectations. Moreover, for short maturities current inflation is a good predictor of inflation risk premia. We also find that short-term real interest rates and expected inflation are significantly negatively correlated and that short-term real interest rates display greater volatility than expected inflation. These results are consistent with empirical studies that use survey data and index-linked bonds to obtain measures of expected inflation and real interest rates. Finally, we show that our economy is consistent with the Mundell-Tobin effect, that is, increases in inflation are associated with higher nominal interest rates, but lower real interest rates.
Financial Crises as Coordination Failures?
We prove under what conditions the strategy of a large population of randomly coupled players engaging in a one-stage game converges in time to a Nash equilibrium, and if so, to which of the different ones. Extending Kandori, Mailath and Rob (1993) results, we introduce a flexible setup where the individual strategy choice is explicitly modeled, where the population dynamics is derived from the aggregation of the individual behaviour, and where a variety of selection and learning mechanisms can be easily introduced. This setup can be used for a novel explanation of financial and currency crises. The model generates herding among agents choice, with the same observational features of similar phenomena produced by social learning, information-driven models.
When do Financial Crises Happen? Dynamic Externality as a Source of Global Instability (work in progress)
This paper explains equilibrium selection in repeated plays of a coordination game in the presence of small stochastic shocks, and uses this mechanism to model currency and financial crises. It provides a novel explanation for market crashes. In the model the economy will spend most of its time fluctuating about the stable state, but spontaneous transitions will occur to a different stable state, without any aggregate shock affecting the economy. Due to the presence of nonlinear interactions the effects of many small independent shocks affecting all agents, usually inconsequential, need not cancel out: they can instead produce large fluctuations in the economy. Agents interact by considering the utility of their investment decreasing in the number of investors who have already abandoned investments in the same currency. A small negative random shock will make them switch investment currency if many others have already switched. This behaviour may determine a currency crisis, depending on the sensitivity of the single investors to the actions of all the others.