The Monetary/Fiscal Policy Mix: Note and Slides
Overview of my research on the Monetary/Fiscal Policy Mix prepared for the G20 Framework Working Group March 2021 meeting.
Lack of Trust and Fiscal Dominance: Evidence from a Firm Survey Experiment
with Renato Faccini, Leonardo Melosi & Nils Wehrhöfer (June 2026)
We study how debt news shapes firms’ inflation expectations in a monetary union. In an active-control experiment, German firms receive optimistic or pessimistic projections of France, Italy, and Spain’s debt-to-GDP ratios. Pessimistic news raises debt beliefs and increases one- and three-year inflation expectations, with no detectable effect at five years. The response is driven by low-trust firms and by firms expecting relatively low ECB policy rates. A salient German debt-financed fiscal shock generates no comparable response. Within a Fisherian framework, the evidence suggests that debt news becomes inflationary when firms perceive incomplete fiscal backing and expect monetary accommodation.
Perceptions of Public Debt and Policy Expectations: Evidence from Cross Country Surveys
with Era Dabla-Norris & Salma Khalid (December 2025)
Utilizing large-scale surveys of more than 27,000 respondents across 13 advanced and emerging market economies conducted between April and May 2024, we examine how knowledge, beliefs, and preferences regarding government debt shape expectations about fiscal policy. Our findings reveal substantial gaps in public understanding of fiscal policy. Individuals consistently underestimate debt levels in high-debt countries and tend to believe that fiscal adjustments will disproportionately affect them. A small group of older individuals holding financial assets demonstrates a significantly better understanding of the fiscal situation and its associated trade-offs. Greater lifetime exposure to fiscal consolidation is linked to increased pessimism about future economic prospects, reduced trust in government, and heightened expectations of rising debt, future tax increases, spending cuts, and inflation. Through randomized controlled experiments, we find that informing respondents about their country’s debt levels lowers expectations of tax increases in contexts of stable debt and raises expectations of spending cuts in countries with rising debt. The impact of this information is moderated by individuals’ past experiences with fiscal consolidation, underscoring the interplay between historical context and current perceptions of fiscal policy.
A Structural Approach to High-Frequency Event Studies: The Fed and Markets as Case History with Sydney Ludvigson and Sai Ma (May 2025)
We integrate a high-frequency event study of Federal Reserve (Fed) communications into a mixed-frequency macro-finance model and structural estimation. The methodology allows for jumps at Fed announcements in investor beliefs about the economic state and/or future regime change in monetary policy conduct, effectively identifying state-dependent reaction functions to real-world events. We find market volatility attributable to Fed announcements is frequently traced to jumps in investor beliefs about future policy conduct that directly affect subjective risk premia. Such jumps can generate a positive comovement between short rates and the stock market, erroneously suggesting a role for "Fed information shocks."
Inflation and Real Activity over the Business Cycle with Gianni Nicolo' and Dongho Song (February 2026)
Forthcoming at the Review of Economic Studies
We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are related to cyclical movements in real activity and unemployment, in line with what is implied by the New Keynesian framework. We then discuss the reasons for which our results relying on a Trend-Cycle VAR differ from the findings of previous studies based on VAR analysis. We explain empirically and theoretically how to reconcile these differences. Online Appendix
The Prestakes of Stock Market Investing with Do Lee, Sydney Ludvigson, and Sai Ma (July 2026)
We use machine learning to identify and explain prestakes predictable mistakes in financial markets arising from distortions and inefficiencies in participants’ subjective beliefs. The algorithm learns independently, remains attentive to fundamentals, credit risk, and sentiment, and makes abrupt course corrections at critical junctures. The subjective beliefs of investors, professionals, and equity analysts do little of this and instead contain prestakes that are especially prevalent in times of market turbulence. The model achieves higher forecasting accuracy due to its greater complexity and richer data. Market timing strategies that bet against prestakes deliver defensive strategies with large CAPM and Fama-French 5-factor alphas.
What Hundreds of Economic News Events Say About Belief Overreaction in the Stock Market
with Sydney Ludvigson and Sai Ma (February 2024)
Conditionally accepted at The Review of Financial Studies
We measure the nature and severity of a variety of belief distortions in market reactions to hundreds of economic news events by synthesizing structural estimation with algorithmic machine learning to quantify bias. We find that investors systematically overreact to perceptions about multiple fundamental shocks, a phenomenon we show often dampens rather than amplifies market volatility via a shock composition effect. Such effects imply that the stock market can underreact to news, even when investors overreact to all shocks.
Who is Afraid of Eurobonds? with Qingyuan Fang, Leonardo Melosi, and Anna Rogantini-Picco (July 2026)
The current euro area policy framework conflates short-run stabilization with long-run fiscal sustainability, exposing members to deflationary and inflationary tail risks. We propose and quantify, in an estimated euro area model, a framework that separates these objectives. A centralized Treasury issues Eurobonds to finance countercyclical stabilization, while national governments retain responsibility for long-term fiscal sustainability. The Treasury can coordinate with the monetary authority in case of a large recession, with no need to suspend fiscal rules at the national level. The arrangement functions as an automatic stabilizer, eliminating the tail risks of deflation and fiscal stagflation.
Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength with Renato Faccini and Leonardo Melosi (July 2022)
The COVID pandemic found policymakers facing constraints on their ability to react to an exceptionally large negative shock. The current low interest rate environment limits the tools the central bank can use to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. Against this background, we study the implications of a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under this coordinated strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority tolerates a temporary increase in inflation to accommodate the emergency budget. In our model the coordinated strategy enhances the efficacy of the fiscal stimulus planned in response to the COVID pandemic and allows the Federal Reserve to correct a prolonged period of below-target inflation. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention. Vox article