Abstract: This paper assesses the impact of temperature shocks on sectoral inflation in the four largest euro area economies. We combine high-frequency weather data with monthly data on consumer prices, industrial production, producer prices and farm gate prices within a set of Bayesian Vector Autoregressions which explicitly considers the seasonal dependence of the shock. Results suggest the presence of significant country asymmetries and seasonal responses of inflation to temperature shocks, mainly via food, energy and service prices. An increase in monthly mean temperatures has inflationary effects in summer – with a stronger response in warmer euro area countries – and reduces inflation on average in the other seasons.

Presented at:  NGFS Workstream on Scenario Design and Analysis (Frankfurt, Germany); ECB-Cleveland Fed conference on Inflation: Drivers and Dynamics 2023 (Frankfurt, Germany, poster session); Climate Change and Global Economi workshop of the Lancaster University Management school (Lancaster, U.K.); Bank of England's Climate and Nature Seminar (online), ICMAIF 2023 (Rethymno, Greece, scheduled);  DG-Research Internal Seminar, ECB (April 2023, Frankfurt am Main, Germany); CFE 2022 (London, UK)

Media coverage: Bloomberg, Cinco días - El País; El Economista (España); Green Central Banking

Abstract: In this paper we analyse labour market dynamics, with a twofold purpose of interpreting the main movements in the labour market variables through the lenses of structural shocks, and at the same time being able to produce reliable and economically interpretable forecasts. Further, we  want to exploit the relevant information contained in the labour market flows. To do so, we use a mixed-frequency Bayesian VAR, which can incorporate the latest released information and take into account monthly and quarterly data. We obtain satisfactory results in forecasting quarterly variables. From an economic perspective, we disentangle the shocks that explained the behaviour of the main economic variables, and, among other findings, we show the relevance of shocks originating in the labour market for explaining the low-wage and low-inflation dynamics between 2014-2018.

Presented at:  EEA-ESEM 2022 (Milan, Italy); CFE 2021 (London, UK); DG-Economics internal seminar series, ECB (Frankfurt am Main, Germany);

Abstract: Through thermal expansion of oceans and melting of land-based ice, global warming is very likely contributing to the sea level rise observed during the 20th century. The amount by which further increases in global average temperature could affect sea level is only known with large uncertainties due to the limited capacity of physics-based models to predict sea levels from global surface temperatures. Semi-empirical approaches have been implemented to estimate the statistical relationship between these two variables providing an alternative measure on which to base potentially disrupting impacts on coastal communities and ecosystems. However, only a few of these semi-empirical applications had addressed the spurious inference that is likely to be drawn when one nonstationary process is regressed on another. Furthermore, it has been shown that spurious effects are not eliminated by stationary processes when these possess strong long memory. Our results indicate that both global temperature and sea level indeed present the characteristics of long memory processes. Nevertheless, we find that these variables are fractionally cointegrated when sea-ice extent is incorporated as an instrumental variable for temperature which in our estimations has a statistically significant positive impact on global sea level. 

Abstract: We propose a novel empirical structural inflation model that captures non-linear shock transmission using a Bayesian machine learning framework that combines VARs with non-linear structural factor models. Unlike traditional linear models, our approach allows for non-linear effects at all impulse response horizons. Identification is achieved via sign, zero, and magnitude restrictions within the factor model. Applying our method to euro area energy shocks, we find that inflation reacts disproportionately to large shocks, while small shocks trigger no significant response. These non-linearities are present along the pricing chain, more pronounced upstream for commodity and producer prices and gradually attenuating downstream for consumer prices. For policy makers, the finding that large shocks transmit differently implies that they may require a differentiated response.

Presented at: ECB DG-Economics internal seminar, DG ECFIN Workshop Post-COVID labour markets: Understanding recent developments, 2025 Ghent University workshop on Empirical Macroeconomics, OeNB/SUERF Annual Economic Conference Monetary policy and structural tectonic shifts, IAAE 2025 (forthcoming), EEA-ESEM 2025 (forthcoming)

Abstract: We document that about 33% of the core inflation basket in the euro area is sensitive to monetary policy shocks. We assess potential theoretical mechanisms driving the sensitivity. Our results suggest that items of a discretionary nature, as reflected in a higher share in the consumption baskets of richer households, and those with larger role of credit in financing their purchase, tend to be more sensitive. Non-sensitive items are more frequently subject to administered prices and include non-discretionary items such as rents and medical services. Energy intensity does not seem to drive our results and the sensitive items are not dominated by durable goods, but are relatively evenly split between goods and services. Estimations over different samples show that the impact of monetary policy shocks on sensitive core inflation has become larger recently.

Presented at:  3rd ESCB CHAMP Workshop of Workstream 2: Transmission through the real economy (Frankfurt, Germany); BSE Summer Forum: Macroeconometrics and Policy Evaluation (Barcelona, Spain); Annual Conference of the International Association of Applied Econometrics (Thessaloniki, Greece); GRAPE Summer workshop on Macro and Finance 2024 (Warsaw, Poland); CEBRA 2024: State-dependence in Monetary Policy Transmission (Frankfurt, Germany); Bank of Finland and CEPR Joint Conference on Back to Basics and Beyond: New Insights for Monetary Policy Normalisation (Helsinki, Finland), CEPR Annual Monetary Economics and Fluctuations Symposium 2024 (Gerzensee, Switzerland), ECB-Cleveland Fed’s Inflation: Drivers and Dynamics Conference 2024 (Cleveland, U.S.); CREI seminar (Barcelona, Spain); IMF seminar (Washington, D.C., U.S.)

Abstract: We propose a framework to identify a rich set of structural drivers of inflation in order to understand the role of the multiple and concomitant sources of the post-pandemic inflation surge. We specify a medium-sized structural Bayesian VAR on a comprehensive set of variables for the euro area economy. We analyse in particular various types of supply shocks, some of which were not considered relevant before the pandemic, notably global supply chain shocks and gas price shocks. The residuals of the VAR are assumed to admit a factor structure and the shocks are identified via zero and sign restrictions on factor loadings. The framework can deal with ragged-edge data and extreme observations. Shocks linked to global supply chains and to gas prices have exhibited a much larger influence than in the past. Overall, supply shocks can explain the bulk of the post-pandemic inflation surge, also for core inflation. Being able to gauge the impact of such shocks is useful for policy making. We show that a counterfactual core inflation measure net of energy and global supply chain shocks has been more stable after the pandemic.

Presented at:  IHW 2023 workshop (Halle, Germany); CFE 2023 (Berlin, Germany); Econometrics Colloquium of Universität Konstanz (Konstanz, Germany); KOF-ETH seminar (Zurich, Switzerland); Annual Conference of the International Association of Applied Econometrics (Thessaloniki, Greece, forthcoming); EEA-ESEM 2024 (Rotterdam, The Netherlands, forthcoming);

Abstract:  The European Central Bank (ECB) has adopted a mixture of conventional and unconventional tools in order to achieve its mandate of price stability in a low-inflation, low-interest-rate environment. This paper contributes to the existing literature by providing a taxonomy of the ECB's policy toolkit and by evaluating its implications on price stability and the anchoring of inflation expectations. Developing a novel high-frequency identification scheme for a large Bayesian Vector Autoregression, I find evidence that forecasters revise their long-term expectations upwards in response to quantitative easing and forward guidance shocks. Consequently, inflation increases and remains significant for over a year after the shock, which stresses the crucial role of expectations for the transmission of monetary policy.

Presented at: DGE-Internal Seminar (virtual); ASSA Meeting 2021 (poster session, virtual); ES Winter Meeting 2020 (virtual); Seminar of the Department of Macroeconomics, DIW Berlin (virtual); Macroeconomics Brownbag Seminar, Humboldt-Universität zu Berlin (virtual); Online Seminar on Empirical Macroeconomics of the Freie Universität Berlin; Seminar of the Department of Statistics, Instituto Tecnológico Autónomo de México (ITAM) (virtual); 2nd Vienna Workshop on Economic Forecasting 2020 (virtual); Topics in Time Series Econometrics, Freie Universität Berlin (Tornow, Germany); Job Market Workshop of the Berlin School of Economics (Berlin, Germany); 13th International Conference on Computational and Financial Econometrics (London, UK); Brownbag Seminar, Federal Reserve Bank of Dallas (Dallas, USA); Vienna Workshop on High-Dimensional Time Series in Macroeconomics and Finance, Institute for Advanced Studies, (Vienna, Austria)