On the Identification of Unfunded Fiscal Shocks with Risk-Neutral Expectation Premium, with Stefano Fasani (Lancaster University), Valeria Patella (Sapienza), Lorenza Rossi (Lancaster University)
Abstract: This paper proposes a novel strategy to identify funded and unfunded fiscal shocks in a Bayesian Structural VAR. Using a structural macro-finance framework, we show that although the two shocks may generate similar responses in inflation, output, and fiscal deficits, they imply opposite signs of the risk-neutral expectation premium (REP). We use these model-implied sign restrictions to identify fiscal shocks in U.S. data. Unfunded shocks account for a substantial share of inflationary episodes, particularly around the COVID-19 fiscal packages. The identified funded and unfunded fiscal shocks align closely with major historical episodes from the 1970s to the post-COVID period, for which we provide a narrative interpretation.
The Insurance Value of Transfers across the Business Cycle, with Dario Bonciani (Sapienza) and Valeria Patella (Sapienza)
Abstract: How does inequality risk shape the effectiveness of fiscal transfers over the business cycle? We address this question through the lens of a medium-scale heterogeneous-agent New Keynesian model in which households face uninsurable transitions between saver and hand-to-mouth status. In this environment, fiscal transfers provide both redistribution and insurance against idiosyncratic income risk, as they reduce precautionary saving motives and strengthen the aggregate demand response. When income risk is low, state dependence is limited and transfer multipliers remain broadly similar across recessions and expansions. However, state dependence becomes more pronounced as the probability of transitioning from saver to hand-to-mouth status increases. In particular, as the probability of becoming hand-to-mouth rises, transfer multipliers become larger and their cyclicality strengthens, reflecting the greater insurance value of transfers and positive general equilibrium spillovers across household groups.