Working Papers 


'It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and we establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized.'


' The effectiveness of central bank communication depends on its precision (the noise in the communication) and its accessibility (the fraction of agents it reaches). Precision and accessibility are interdependent. Most of the existing theoretical work on central bank communication focuses on one or the other. In this paper I show that accounting for their interaction is essential for optimal communication design. Within two different information structures, I show that disclosing too precise information is detrimental if it reaches a small audience, even if the alternative is no disclosure to anyone. The optimal degree of precision is increasing in the share of people who can understand it. My analysis suggests it is better to provide simple and clear statements rather than very detailed information that only few can understand.'


' How should a Central Bank communicate information to the public? Standard economic practice suggests that Central Banks should maximize the two following features of communication: precision, i.e. minimizing the noise, and credibility , i.e. the fraction of agents that believes the  Central Bank. In this paper I develop a theoretical framework to study optimal communication strategy jointly along the two dimensions. I then apply it to a Central Bank communication problem to determine whether the standard behavior (maximizing precision and understandability) is consistent with welfare maximization. The result is surprising: while it is true that Central Banks should always be as precise as possible, it is not true that they should maximize credibility `a priori'. This result sheds new light on the `forward guidance puzzle' introducing a trade-off between maximizing forward guidance's effectiveness and maximizing social welfare.