Research
Publications
The Global Component of Inflation Volatility (with Andrea Carriero and Massimiliano Marcellino)
Journal of Applied Econometrics, 2022, 37( 4), 700– 721.
Tema di discussione (Economic working paper) 2018, n.1170
CEPR Working Paper, no. 13470, 2019.
Global developments play an important role for domestic inflation rates. Earlier literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation volatility is indeed important, and a substantial fraction of it can be attributed to a global factor that is also driving inflation levels and their persistence. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies. Finally, we show that the point and density forecasting performance of the model is good relative to standard benchmarks, which provides additional evidence on its reliability.
Anchored or de-anchored? That is the question (with Stefano Neri and Alex Tagliabracci)
European Journal of Political Economy, Volume 69, September 2021,102031
Occasional Papers (Questioni di economia e finanza), n. 516
This paper shows that long-term inflation expectations have become de-anchored from the ECB Governing Council’s inflation aim. The long-term expectations in the ECB’s Survey of Professional Forecasters have not returned to the levels that prevailed before the 2013-14 period of disinflation, and their distribution is still skewed towards lower inflation levels. Moreover, long-term expectations have become sensitive to short-term ones and to negative inflation surprises. Forecasters who participated in most of the surveys are the most responsive to short-term developments in inflation.
Labor Market and Financial Shocks: a Time-Varying Analysis (with Valerio Nispi Landi)
Journal of Money, Credit and Banking, 2020, 52(4), 777-801
Tema di discussione (Economic working paper version) 2018, n.1179
Motivated by the events of the Great Recession, we estimate a time-varying structural VAR model to analyze the effects of a financial shock on the labor market, focusing on the US. Our results indicate that a tightening of financial conditions is highly detrimental to the labor market. Moreover, we show that financial shocks have affected the unemployment rate asymmetrically in the last three decades, an implication that a standard VAR cannot capture: while negative financial shocks have been responsible for increases in unemployment, our model does not find significant contributions of financial shocks during periods of expansion. The source of this asymmetry is the time-varying standard deviation of the identified shock, which is higher in times of financial distress; on the other hand, we find the transmission mechanism is almost constant over time.
WORKING/policy PAPERS
Inflation is not equal for all: the heterogeneous effects of energy shocks (with Marianna Riggi)
Tema di discussione (Economic working paper) 2023, n.1429
Energy price shocks broaden inflation inequality, measured by the gap between consumer prices for households at the bottom and top of the expenditure distribution, which is due to different consumption baskets. We provide a VAR-based quantification of the impact of energy shocks on inflation inequality. We then develop and estimate a general equilibrium two-agent model with imported energy to rationalize the empirical results and show why this effect becomes stronger when monetary policy responds aggressively to inflation. Indeed, though less affluent consumers too benefit from the containment of inflation resulting from monetary policy action, they do so to a lesser extent than more affluent ones, given the relatively lower share of consumption spent on items whose prices are sensitive to cyclical conditions. Our results call for the need to complement the monetary policy response with targeted fiscal measures.
Energy price shocks and inflation in the euro area (with S. Neri, F. Busetti, C. Conflitti, D. Delle Monache and A. Tagliabracci)
Questioni di economia e finanza (Occasional Papers) 2023, n. 792
This paper evaluates the effects of rising energy commodity prices on euro-area inflation in 2021-22. The analysis relies on a wide range of empirical models and focuses especially on the period that started with the dramatic rises in energy prices.
We estimate that rising energy prices contributed, both directly and indirectly, to roughly two thirds of euro-area inflation in 2022. Their contribution to core inflation (i.e. excluding energy and food components) appears to have ranged between 20 and 30 per cent and was somewhat larger in the last quarter of the year (between 20 and 50 per cent). There is also evidence of an appreciable increase in the pass-through of energy prices to core inflation following the outbreak of the pandemic.
Inflation and energy price shocks: lessons from the 1970s (with M. Gomellini and D. Pellegrino)
Questioni di economia e finanza (Occasional Papers) 2023, n. 790
The paper examines the oil-price shocks that impacted on the global economy in the 1970s, leading to high rises in inflation that proved to be considerably long-lasting in some advanced countries.
We investigate the possible reasons for the failure of monetary policy to contain price rises at that time, and show how certain institutional features, namely the lack of central bank independence, the automatic indexation of wages to prices, a high level of conflict in industrial relations, and a set of fiscal policy rules that led to growing imbalances between public expenditure and tax revenues, may have significantly contributed to inflation persistence.
Quantity versus price dynamics: the role of energy and bottlenecks in the Italian industrial sector (with M. Flaccadoro and S. Villa)
Questioni di economia e finanza (Occasional Papers) 2023, n. 781
The study analyses the impact of energy price increases and of shortages in the supply of inputs on producer prices and production in the Italian industrial sector since 2021. It formulates price and production indices on the basis of the energy intensity of the different subsectors and it examines the indications provided by the Bank of Italy's Business Outlook Survey of Industrial and Service Firms.
Since the beginning of 2021, the producer prices of industrial goods have grown more in energy-intensive sectors than in non-energy-intensive sectors, although trends in industrial production only began to differ between the two groups starting from the spring of 2022. The responses to the survey indicate that a high proportion of firms have revised the prices of their goods upwards in response to energy price increases, while only a limited percentage of firms have reduced production.
Assessing the pass-through of energy prices to inflation in the euro area (with A. Tagliabracci)
Questioni di economia e finanza (Occasional Papers) 2023, n. 745
This paper focuses on the developments of energy prices since mid-2021 and assesses their impact on headline inflation in the euro area and in its four largest countries. It considers both direct and indirect effects, i.e. transmission through the core and food components.
While the contribution of energy inflation to core and food inflation is generally low in normal times, the unparalleled energy price shock has generated a sizeable (positive) contribution to inflation. In the first nine months of 2022, energy inflation accounted on average for roughly 60 per cent of headline inflation in the euro area, either directly or indirectly. The same result holds qualitatively true for the four largest countries in the euro area, although with some quantitative differences.
On the anchoring of inflation expectations in the euro area
(with S. Neri, G. Bulligan, S. Cecchetti, A. Papetti, M. Riggi, C. Rondinelli and A. Tagliabracci)
Questioni di economia e finanza (Occasional Papers) 2022, n. 712
This paper provides an assessment of the degree to which long-term inflation expectations in the euro area are anchored to the ECB's price stability objective, with reference to the period following the announcement of the revised monetary policy strategy. This period was characterized by a marked increase in energy commodity prices. Various measures of expectations (inferred from surveys of professional forecasters, households, firms, and implied by financial asset prices) and different econometric approaches are used for this purpose. The analysis suggests that long-term inflation expectations have returned to levels close to the ECB's inflation target after July 2021. However, in light of the persistent inflationary pressures, monitoring the risk of de-anchoring plays an essential role in assessing the appropriateness of the speed of monetary policy normalization.
De-anchored long-term inflation expectations in a low growth, low rate environment (with S. Neri, G. Bulligan and A. Tagliabracci)
Questioni di economia e finanza (Occasional Papers) 2021, n. 624
The de-anchoring of long-term inflation expectations (the gap between inflation expectations and the central bank's target) represents a challenge for monetary policy, since it restrains its policy space. This work, which uses data from the ECB Survey of Professional Forecasters, examines the anchoring of long-term inflation expectations in the euro area in light of the expected macroeconomic environment characterized by low growth and low inflation in the long-term. Using both time series and panel data methods, this work shows that the level of long-term inflation expectations registered two significant declines in 2013 and 2019, moving away from the ECB's inflation aim. Empirical evidence shows that the decrease in inflation expectations has recently been associated with a progressive reduction in the long-term expectations of real GDP growth.
The Economic Drivers of Volatility (with Andrea Carriero and Massimiliano Marcellino)
Tema di discussione (Economic working paper) 2020, n.1285
Many economic variables feature changes in their conditional volatility, and stochastic volatility specifications are commonly used in macroeconomic applications to model this feature. In this paper we decompose the shocks driving the volatility processes into structural economic shocks, in order to understand the relative importance over time of demand, supply and monetary/financial shocks as drivers of volatility. The structural shocks drive both the volatilities and the levels of the variables. They are obtained from a Multivariate Autoregressive Index (MAI) model for a large set of real, nominal and financial indicators, a particular reduced rank VAR that can be also interpreted as a factor model, featuring stochastic volatility. Technically, we develop a Gibbs Sampling algorithm for (Bayesian) inference, introducing efficient computational strategies to reduce the computational burden. Economically, using US data, we find that the common component of volatility is substantial, it explains at least 50% of the overall volatility for most variables, though the share is declining over time for some real variables. A large fraction of the common volatility component is driven by structural demand, supply and financial shocks, in general more than 50%, with their relative importance being variable dependent and, sometimes, changing over time.
old PAPERS
Yield curve forecasting in the euro area (with Marco Taboga)
We assess the ability of competing models and estimation methodologies to provide accurate point and density forecasts of government yield curves. We focus on euro area countries, which have been seldom analyzed in the literature despite the importance of the yield curve in the Eurosystemís and ECBís forecasting frameworks. We Önd that among several models, including those that have been successful in forecasting the US yield curve, no one can produce point forecasts that are consistently superior to random-walk forecasts. We instead Önd that density forecasts produced with Bayesian stochastic volatility models featuring a random walk component are correctly calibrated (i.e., the assigned probabilities are close to the relative frequency of the observed outcomes) and achieve the best performance in terms of continuous ranked probability scores.
This paper reviews some strategies to model time variation within Vector Auto Regressions (VAR) and Structural VAR models, concerning both VAR coefficients and volatility of unexplained components. In particular, the analysis focuses on methodologies and algorithms that allow the joint modeling of a large number of variables and lags, by diminishing the burden of large parametrization using rank reduction, as in de Wind and Gambetti (2014). Model estimation, implemented within a Bayesian framework, is ameliorated and explained in detail. Furthermore, alternative specifications dealing with parameters instability are discussed, along with their estimation strategies.