research
Working Papers and Work in Progress
Profits, Firm Ownership and Aggregate Demand Externalities (with A. Daripa and I. Samiri) coming soon
Time Variation in Lifecycle Consumption and Income (with H. Basso and C. St Aubyn) under revision
We document systematic and significant time variation in US lifecycle non-durable consumption profiles. Consumption profiles have consistently become flatter: differences in consumption across generations have decreased. Pooling data across different periods to identify lifecycle profiles masks relevant time variations and may artificially generate hump-shaped consumption age profiles. The main driver behind lifecycle consumption variations are lifecycle income changes, which display similar flattening. Employing a lifecycle model we show changes in income are sufficient to match the movements in consumption. The contributions of credit, housing and interest rates changes are quantitatively small.
Federal Reserve Chairs and Causality Regimes (with R. Morita and H. Psaradakis) under revision
We provide a comprehensive account on the evolution of macroeconomic causal relationships and map the direction of causality associated with Federal Reserve chairs' tenures since 1965. While the Federal Funds rate (FFR) or Domestic Money (DM) have causal predictive content to explain variations in real output and inflation in most periods, we report that these are often substitutes in their role as lead or feedback variables. Estimated shifts in smoothed regime probabilities align remarkably well with monetary policy shock dates as identied by Romer and Romer (1989, 1994, 2004).
Securitization and Asset Prices, Banco de Espana Working Papers 1526, Banco de Espana. (with Henrique Basso), 2015.
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Publications
Fertility Changes and Replacement Migration, (2020), Economics Letters, 196, pp.109519, (with G. Zoega) BibTeX.
We study OECD countries that differ in immigration policies but share a high level of human capital. We find significant negative statistical relationship between 16 years lagged fertility and the rate of immigration in a panel of 23 countries, which indicates that immigration compensates for low fertility in the labor market.
Demographic Structure and Macroeconomic Trends, (2019) American Economic Journal: Macroeconomics , 11(1), pp.193-222. (with Henrique Basso, Ron Smith and Tobias Grasl). online appendix BibTeX
We estimate the effect of changes in demographic structure on long-term trends of key macroeconomic variables using a Panel VAR for 21 OECD economies from 1970-2014. The panel data variation assists the identification of demographic effects, while the dynamic structure, incorporating multiple channels of influence, uncovers long-term effects. We propose a theoretical model, relating demographics, innovation and growth, whose simulations match our empirical findings. The current trend of population aging and low fertility is projected to reduce output growth, investment and real interest rates across OECD countries.
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German and French commentaries in the Swiss magazine Die Volkswirtschaft
BBK Magazine, BCAM 2016 conference presentation/discussion (video)
BEI Week 2022: Resilience in an Uncertain World (video)
Coverage: Vice-President of the Deutsche Bundesbank Speech Michael Sounders (MPC BoE) Speeches, 1,2
Medium-run Implications of Changing Demographic Structures for the Macroeconomy (2017), National Institute Economic Review, 241 (1), pp. R58-R64, (with Henrique Basso and Ron Smith) . BibTeX
media coverage: The Telegraph,
Liquidity, Term Spreads and Monetary Policy, (2014) (with Henrique Basso ),(2014), Economic Journal, 124, pp.1234-1278. BibTeX WP version
We propose a model with segmented markets that delivers endogenous variations in term spreads driven by banks' portfolio decisions while facing maturity risk. Future profitability influences the term premium that banks require to carry this risk. When expected profitability is relatively high (low) spreads are low (high). Spread fluctuations feed back into the macroeconomy through investment decisions. Econometric evidence corroborates this link between expected financial profitability and yield spreads. Finally, we analyse unconventional monetary policy by allowing banks to sell assets to the central bank. These interventions exploit a new channel of policy transmission through banks' portfolio choice affecting the yield curve.
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Lending Relationships and Monetary Policy, (2013), Economic Inquiry, 51(1), pp. 368-393, (with Henrique Basso and Javier Coto-Martinez). BibTeX
Financial intermediation and bank spreads are the important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are (a) banking spreads move countercyclically generating amplified output responses, (b) spread movements are important for monetary policymaking even when a standard Taylor Rule is employed, (c) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (d) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the Central Bank to react to spread movements.
A Quantitative Exploration of the Opportunistic Approach to Disinflation, (2006), Journal of Monetary Economics, 53(8), pp. 1877-1893, (with Orphanides, A., Small, D., Wieland, V., and D. Wilcox). BibTeX
Under a conventional policy rule, a central bank adjusts its policy rate linearly according to the gap between inflation and its target, and the gap between output and its potential. Under “the opportunistic approach to disinflation” a central bank controls inflation aggressively when inflation is far from its target, but concentrates more on output stabilization when inflation is close to its target, allowing supply shocks and unforeseen fluctuations in aggregate demand to move inflation within a certain band. We use stochastic simulations of a small-scale rational expectations model to contrast the behavior of output and inflation under opportunistic and linear rules.
US Domestic Money, Inflation and Output, (2006), Journal of Monetary Economics, 53(2), pp 183-197, lead article (with Tomasz Piskorski). Data BibTeX
Recent empirical research documents that the strong short-term relationship between U.S. monetary aggregates on one side and inflation and real output on the other has mostly disappeared since the early 1980s. Using the direct estimate of flows of U.S. dollars abroad we find that domestic money (currency corrected for the foreign holdings of dollars) contains valuable information about future movements of U.S. inflation and real output. Statistical evidence suggests that the Friedman–Schwartz stylized facts can be reestablished once the focus of analysis is back on the correct measure of domestic monetary aggregates.
US Domestic Currency in Forecast Error Variance Decompositions of Inflation and Output, (2005), Economics Letters, 86(2), pp. 265-271, (with Tomasz Piskorski). BibTeX
We find that domestic currency, currency corrected for foreign holdings, has a substantial share in forecast error variance decomposition of US inflation. We also find that domestic currency has higher share of the forecast error variance decomposition of US real output than any other narrow monetary aggregate we consider.
Do Asymmetries Matter for European Monetary Policy?, (2002), European Economic Review, 46(3), pp.443-469, (with Paul De Grauwe and Hans Dewachter). BibTeX
In this paper we analyze the impact of economic and institutional (ECB decision rules) asymmetries on the effectiveness of monetary policy in Euroland. We consider a model where asymmetric shocks and divergent propagation of shocks in output and inflation are potential causes of tensions within the ECB concerning the conduct of common monetary (interest rate) policy. Welfare implications of the alternative decision procedures are discussed.
Exchange Rate Pass-Through in Vertically Related Markets, (2000), Review of International Economics, 8, pp. 235-251 (with Yohanes Eko Riyanto). BibTeX
The paper provides a theoretical framework which addresses exchange rate pass-through within the setting of vertically related markets. In particular, foreign firms' price adjustment in response to an exchange rate shock is evaluated. This permits study of the importance of cost effects of the exchange rate shock. Recent empirical evidence indicated the relevance of these cost effects. It is shown that one can decompose the effects of an exchange rate shock on the final goods market into direct and indirect components. The indirect effect works through the input market. The degree of pass-through then depends on the relative importance of direct and indirect effects, which in turn depends on the nature of vertical structures and strategic firm behavior. It is shown that the institutional aspects of vertically related markets play a role in explaining incomplete price adjustments in both intermediate and final goods markets and the failure of PPP in the short run.
Other
An Empirical Investigation of US Fiscal Expenditures and Macroeconomic Outcomes, (2012) Economics Letters, 114(1), pp. 64-68, (with Giovanni Melina) BibTeX
In addition to containing stable information to explain inflation, state-local expenditures also have a larger share of the forecast error variance of US inflation than the federal funds rate. Non-defense federal expenditures are useful in predicting real output variations and, starting from the early 1980's, also present a larger share of the forecast error variance of US real output than the federal funds rate.
US Fiscal Indicators, Inflation and Output (2011), The North American Journal of Economics and Finance, 22(3), pp. 221-236, (with Giovanni Melina). BibTeX
We explore the information content of a large set of fiscal indicators for U.S. real output growth and inflation. We provide evidence that fluctuations in certain fiscal variables contain valuable information to predict fluctuations in output and prices. The distinction between federal and state-local fiscal indicators yields useful insights and helps define a new set of stylized facts for U.S. macroeconomic conditions. First, we find that variations in state-local indirect taxes as well as state government surplus or deficit help predict output growth. Next, the federal counterparts of these indicators contain valuable information for inflation. Finally, state-local expenditures help predict U.S. inflation. A set of formal and informal stability tests confirm that these relationships are stable. The fiscal indicators in questions are also among the ones that yield the best in-sample and out-of-sample performances.
Investment Cost Chanel and Monetary Transmission, (2011), Central Bank Review, Vol. 11(2), pp.1-13.(with Henrique Basso and Javier Coto-Martinez)
We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects.
Non-linearities and Unit Roots in G7 Macroeconomic Variables, (2008), The B.E. Journal of Macroeconomics, Berkeley Electronic Press, 8(1) Article 5, (with Miguel Leon Ledesma) BibTeX
We carry out a meta-analysis on the frequency of unit-roots in macroeconomic time series with a dataset covering 249 variables for the G7 countries. We use linear tests and the three popular non-linear tests (TAR, ESTAR and Markov Switching). In general, the evidence in favour of the random walk hypothesis is weaker than in previous studies. This evidence against unit roots is stronger for real and nominal asset prices. Our results show that rejection of the null of a unit root in the macro dataset is substantially higher for non-linear than linear models. Finally, the results from a Monte Carlo experiment show that rejection frequencies are very close to the nominal size of the test when the DGP is a linear unit root process. This leads us to reject the hypothesis that overfitting deterministic components explains the higher rejection frequencies of nonlinear tests.
Exchange Rates, Prices and International Trade in a Model of Endogeneous Market Structure, (2007), The Manchester School, 75, pp. 160-92, (with Hanno Lustig). BibTeX
We suggest a new dynamic equilibrium approach that features product differentiation and endogenizes market structure at the same time. The model yields clear-cut predictions regarding the effects of small and large exchange rate shocks on the market structure, pass-through and international trade. First, we account for the asymmetric price adjustment process with respect to exchange rate shocks. Second, we discuss an array of conditions where short- and long-run international monetary neutrality is violated. We present in detail under which conditions imperfect competition is able to generate persistent and volatile real exchange rate deviations. Most predictions survive alternative market configurations.
Firms, International Money and Prices: A Survey of the Literature, (2001), Review of Business and Economics, 46, pp. 175-201. BibTeX
Sluggish price adjustments with respect to exchange rate shocks take essentially two forms. Firstly, prices do not adjust completely to neutralize the effects of nominal exchange rate shocks. Secondly, price adjustments after exchange rate shocks only take place in discrete time intervals, in other words they are discontinuous. These two features of price adjustments form our definition of international price rigidities. In this paper we shall present a survey of the empirical and theoretical literature on international price rigidities. We provide the underlying intuition of the theoretical research and present a brief summary of the empirical findings.
Are Central European Countries Part of the European Optimum Currency Area, (1999), in De Grauwe, P and Lavrac, V. (eds.) Inclusion of Central European Countries in the European Monetary Union, pp. 13-36, Kluwer Academic Publishers, Dordrecht. (with Paul De Grauwe)
From EMS to EMU: Are We Better Off?, (2000), in Eichengreen, B. and J. Frieden, The Political Economy of European Monetary Unification, Second Edition, Westview, Boulder. (with Paul De Grauwe and Hans Dewachter)
In Turkish
Yeni Şeyler Söyleme Zamanı, 2010, Sarı Siyah
Türkiye'nin Omurgası Kırılıyor (2002). Iktisat dergisi (421-28), pp. 12-16.