Research

Publications & Working Papers : 

"Expectation-Driven Cycles and the Changing Dynamics of Unemployment" with Antonello D'Agostino, Caterina Mendicino

Journal of Money, Credit and Banking, February 2022

Abstract: This paper provides new evidence on the role of expectations for the change in unemployment dynamics over time. We show that unanticipated changes in expectations display large and persistent effects on the unemployment rate in the 2007–09 downturn, contributing to maintain unemployment high well after the most recent recession. We also find that the changes in the autocorrelation of the unemployment rate and its correlation with inflation generated by unanticipated changes in unemployment expectations help to rationalize the pattern observed in the data in the post-1990 recessions.

"State-dependent pass-through from monetary policy to lending rates" [Slides]

Presented at Northwestern University, Federal Reserve Chicago, Bank of Canada, Wisconsin School of Business Finance, Bank of England, Bank of Spain, Universidad Carlos III de Madrid Finance, University of Mannheim, Federal Reserve Board Financial Stability, CREI, Bank of Italy, Einaudi Institute for Economics and Finance, Sverige Riksbank, National University of Singapore, University of Naples, 2023 International Conference Computing in Economics and Finance, the 59th Canadian Economics Association Conference, the 2023 Midwest Macroeconomics Meetings, the 29th Conference on Computing in Economics and Finance, the 3rd Sailing the Macro Workshop, and the ESM Economic modelling in policy Institutions

Abstract: The efficacy of monetary policy depends crucially on the extent to which bank lending rates respond to changes in policy rates. This paper documents that this response is state-dependent. I show empirically that the key state variable is the skewness of the cross-sectional distribution of lending rates across banks prior to the change in the policy rate. High initial skewness leads to a stronger response of (i) bank lending rates and (ii) economic activity to monetary policy. I develop a model of imperfect competition among banks that accounts for this empirical finding. A key feature of the model is that borrowers face search and switching frictions. A higher degree of dispersion among lending rates increases borrowers' expected returns to search. In these circumstances, strategic behaviour by banks leads to higher responsiveness of lending rates to policy rate changes. Through this channel, the model can also reconcile my finding that conventional monetary policy has stronger effects on economic activity the more skewness there is in bank lending rates.

"Banks and the State-Dependent Effects of Monetary Policy" with Martin Eichenbaum, Sergio Rebelo, and Mathias Trabandt. (Slides)

NBER WP, February 2025

Abstract: We show that the response of banks’ net interest margin (NIM) to monetary policy shocks is state-dependent. Following a period of low (high) Federal Funds rates, a contractionary monetary policy shock leads to an increase (decrease) in NIM. Aggregate economic activity exhibits a similar state-dependent pattern. To explain these dynamics, we develop a banking model in which social interactions influence households’ attentiveness to deposit interest rates. We embed that framework within a nonlinear heterogeneous-agent NK model. The estimated model accounts well quantitatively for our key empirical findings.

"Digital Platform Acquisitions and Growth" with Jane Olmstead-Rumsey and Liangjie Wu.

Abstract: We develop a model of consumption through a platform to understand the growth effects of acquisitions by platform-based firms. The platform supplies some of the products in the economy and startups supply the rest. The platform chooses how much of its appeal to share with the startups (‘’product tying”), balancing the incentive to increase sales of its own products against the desire to attract users to the platform. The chance to be acquired by the platform provides a motive for startup entry. But acquisitions also expand the platform's product offerings (``ecosystem dominance"), increasing tying and lowering the profits of non-acquired startups which are the other motive for entry. Theoretically, acquisition bans always reduce growth in the short run but may have long-run benefits. The model calibrated to U.S. households' platform time use suggests negligible welfare gains from an acquisition ban. 

Work in Progress: 

"Central Bank Liquidity Shocks" with Martina Jasova, Caterina Mendicino,  Ivan Petrella and Dominik Supera. [Slides]

Abstract: What are the effects of shocks to central bank liquidity injections? The elevated endogeneity of central bank liquidity provision makes answering this question very challenging empirically. This paper tackles this challenge by constructing a novel external instrument based on granular data on ECB and Private Market Repo quotes. We show that Central Bank Liquidity shocks in the Euro-Area had significant and beneficial effects on many Macro and Financial Outcomes, including GDP, Unemployment, Systemic Risk, Sovereign Debt, and Credit Spreads. Compared to conventional monetary policy shocks, they tend to transmit throughout the yield curve, flatten its slope, and allow for more targeted regional interventions. These results suggest that shocks to central bank liquidity injections might be a valuable addition to conventional policy rate shocks going forward as a means of fine-tuning and direct intervention in targeted troubled areas of the economy. 

"Policy Rate Shocks Beyond Zero" [Draft available upon request] with Caterina Mendicino, Juan F. Rubio-Ramirez and Dominik Supera

Presented at SED 2022 Annual Meeting SCE 2022 Annual Meeting, SAET 2022 Annual Conference, 24th Central Bank Macroeconomic Modelling Workshop, 11th RCEA Money-Macro-Finance conference, Warsaw International Economic Meeting, RCEA 3rd Warsaw Money-Macro-Finance Conference

Abstract: This paper shows that the aggregate effects of policy rate shocks on economic and banking activity do not exhibit significant differences when policy rates are above or below zero. We use a suit of VAR models in conjunction with macroeconomic, financial and banking data for the Eurozone. Policy rate cuts below zero significantly improve borrowing conditions for non-financial corporations and are also passed onto depositors by banks. The easing in bank lending conditions, however, does not translate into higher systemic financial risk in the banking sector, reflecting positive effects on the financial soundness of banks and non-financial corporations. Moreover, both corporate and household deposit rates respond with the same sign and magnitude to policy rate shocks. Yet, we find state-dependency in the way banks respond to policy rate cuts below zero: the pass-through of policy rate shocks to lending rates is increasing in the initial level of the deposit rate.

"Are Recursive Neural Networks Useful for Macroeconomic Forecasting?" with Carl Hallman and Emre Enes Yavuz

Abstract: We horse-race a Bayesian VAR with hierarchical priors, one of the state of the art macroeconomic forecasting models, with different neural networks. These include a simple RNN, a GRU, and a GRU regularized such that it shrinks towards with the noise (GRU-VAR). We find that any sufficiently flexible, and well regularized model has similar forecasting performance as the Bayesian VAR. We find that our GRU-VAR easily outperforms the BVAR in forecasts that go further than one step.

"The Contribution of Cooperative Credit Banks to financial stability over the business cycle" 

Presented at EURICSE 13th International Conference 2022, The future of Financial Mutuals 2023

Abstract: Do different bank business models contribute differently to a country's financial stability? Our short answer is yes. Through a new dataset that captures the universe of Italian banks and the economic environment in which they operate, this paper presents a comparative analysis of the two most widespread banking business models in terms of financial stability: the for-profit model of Commercial Banks and the mutualistic model of Cooperative Credit Banks. We measure financial stability along different dimensions by constructing three indicators: the z-score, a popular measure of the solvency risk of a banking institution, and two indicators, proposed in this study, dubbed lzscore and rzscore, which are aimed at quantifying the liquidity risk and regulatory risk, respectively, of a banking institution. Our results show that Cooperative Credit Banks, on average, score higher values in each of the three proposed measures and display a denser group of particularly virtuous institutions than Commercial Banks. The finding can be mainly attributed to the significantly lower volatility of profits and cash flows in Cooperative Credit Banks. Using panel regression methodologies, we show that even when controlling for several bank-level balance sheet and income characteristics, as well as demand and competition factors to which each bank is exposed, cooperative credit banks, on average, exhibit significantly higher measures of financial stability than commercial banks in terms of solvency, liquidity, and regulatory risk. When focusing on the growth rates of financial stability indicators, our results finally highlight significant non-linearities: during expansion periods, Cooperative Credit Banks tend to experience significantly higher reductions in terms of regulatory risk than Commercial Banks, whereas both during recessions and economic expansions, Cooperative Credit Banks have lower growth rates in terms of our liquidity indicator. We conclude that the business model of cooperative credit banks has a substantially positive and relevant contribution to the financial stability of an economy. Policies aimed at favoring and maintaining a flourishing ecosystem of cooperative credit institutions would greatly benefit the overall resilience of the banking system.

"International Cyclical Patterns and Synchronization" with Jingxiong Hu

Abstract: We study the spectral properties of various macroeconomic and financial variables in a panel of 18 countries over the 1870-2016 period. We document three main findings. First, the variables can be decomposed into several cyclical components at different frequencies. The business cycle component is not always the most prominent driver of the variables’ fluctuations. Second, for most variables, the cross-country cyclical synchronization (a measure of cycle co-movement) exhibits a “V-shaped” pattern, trending downwards from 1870 to the mid-1960s and upwards after 1980. Third, global trade and financial integration contributed significantly to this “V-shaped” pattern in synchronization.

Policy Papers and Notes: 

"Israel’s Fiscal Prospects in the Post-COVID-19 Era" [Policy Note] with Martin Eichenbaum

Bank of Israel: Monetary Policy in a period of price stability, May 2022

Abstract: We reassess the fiscal position of the Israeli and U.S. governments, and argue that Israel faces three potential challenges: high debt-to-gdp ratio after COVID, modest rise in forecasted government bond yields and effect of tail events on government budget sustainability. To buy partial insurance against these tail events, Israel needs to return to its pre- COVID-19 policy of lengthening the average maturity of government debt.  

Discussions:

"Changing Skin in Local Banking: Evidence from the Italian Mutual Bank Reform", by Luca Casolaro and Silvia Del Prete. Link