Research

Behind the scenes of the beauty contest: window dressing and the G-SIB framework joint with Markus Behn, Laura Parisi and Michael Wedow, International Journal of Central Banking (2022)

Abstract: This paper illustrates that systemically important banks reduce a range of activities at year- end, leading to lower additional capital requirements in the form of G-SIB buffers. The effects are stronger for banks with higher incentives to reduce the indicators, and for banks with balance sheet structures that can more easily be adjusted. The observed reduction in activity may imply an overall underestimation of banks’ systemic importance as well as a distortion in their relative ranking, with implications for banks’ ability to absorb losses. Moreover, a reduction in the provision of certain services at year-end may adversely affect overall market functioning.

 Demographic Trends and the Transmission of Monetary Policy, JMP, August 2022

Abstract: This paper studies the impact of demographic trends on the effectiveness of monetary policy. I propose and quantify a novel channel to explain how population aging might affect the transmission of monetary policy and the flattening of the Phillips curve: older individuals devote a larger share of their consumption bundle to product categories with higher levels of price rigidity - categories that adjust their prices less often - so the aggregate frequency of price adjustment decreases as the population ages. Using micro data on consumer expenditure, I document the negative relationship between age and the frequency of price adjustment and find that it is mainly due to the higher share of services consumed by old households. At the macro level, if prices are more rigid output should respond more to monetary shocks. To test this hypothesis, I exploit the cross-sectional variation in demographic structures among U.S. states and I show that the economic activity in states with a higher old-age dependency ratio reacts more to monetary shocks. I rationalize these findings using a two-sector OLG New Keynesian model where demographic trends shift aggregate demand towards services, the stickier expenditure category. Combining the model with population projections for the U.S., I find that the changes in the age distribution between 1980 and 2010 increased the contemporaneous response of output to monetary shocks by 6% and will have increased it by 10% by 2050. Moreover, demographic trends explain around 10% of the decrease in the slope of the Phillips curve.

Do firm expectations respond to monetary policy announcements? joint with Federico di Pace and Riccardo M. Masolo, February 2023

Abstract:  We study whether firms' expectations react to the Bank of England's monetary policy announcements by comparing the responses to the Decision Maker Panel (DMP) survey filed immediately before and after a Monetary Policy Committee (MPC) meeting. On the one hand, we find that firms' expectations and uncertainty about their own business for the most part do not respond to high-frequency monetary policy surprises. On the other hand, announced changes in the monetary policy rate induce firms to revise their price expectations, with rate hikes inducing a reduction in price expectations and uncertainty surrounding them.

On the Distributional Effects of Conventional Monetary Policy and Forward Guidance joint with Pascal Meichtry, November 2022

Abstract: This paper compares the distributional effects of conventional monetary policy and forward guidance. Adopting a structural VAR model, we first estimate the impact of both policies on the macroeconomy and on consumption inequality in the United States. We find similar responses of aggregate real and financial variables. In contrast, consumption inequality is countercyclical after a monetary policy shock but responds procyclically to forward guidance, due to the diverse reactions of households at the top and bottom of the consumption distribution. We build a New Keynesian model with household heterogeneity to rationalize these differences. Motivated by the empirical evidence, we highlight the government's response via a fiscal transfer scheme that reacts to changes in the debt burden and to cyclical variations. A fiscal adjustment differing in timing and magnitude leads to a relatively larger decline in consumption among financially constrained agents under conventional monetary policy, but a smaller decline under forward guidance. Our findings emphasize the importance of considering the negative second-order effects that different central bank tools might entail and the crucial role of fiscal adjustments in mitigating these effects.

Carbon Pricing and Inflation Expectations: Evidence from France joint with Jannik Hensel and Luca Moretti, November 2022

Abstract: This paper studies the impact of carbon pricing on firms' inflation expectations and discusses the potential implications for what constitutes the core of most central banks' mandate: price stability.  As in Diego Känzig (2022), carbon policy shocks are identified from changes in carbon futures price around regulatory events. The shock series is combined with French firm-level survey data.  We document that a change in the price of carbon increases firms' inflation expectations.  We then investigate how firms' business conditions are affected by carbon policy shocks and we find that firms' own expected and realized price growth respond similarly to inflation expectations.  The effect on price expectations is more persistent than on actual price growth leading to positive forecast errors in the medium-/long-run.  Finally, we show that a sizable share of the increase in inflation expectations is due to second-round effects.  Firms rely on their own business conditions to form expectations about the aggregate price dynamics.  Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations.

The Geographic Effects of Carbon Pricing, September 2022

Abstract: This paper studies the heterogeneous impacts of carbon pricing on European regions. I follow Diego Känzig (2022) and identify carbon policy shocks from changes in carbon futures price around regulatory events. The shock series is then combined with granular data on economic activity at the city- and county-level in Europe. I document that poorer regions are significantly more exposed to these shocks. Two years after a carbon policy shock the output of regions at the bottom quartile of the gross value added per capita distribution decreases more than twice as much relative to the output of regions in the top quartile. I investigate which channels might explain this result and find that the most important driver is across-country variation rather than sectoral compositions or within-country variation. The empirical evidence provided strongly encourages better coordination among European countries to avoid the economic costs of carbon pricing being unequally borne.

Monetary policy shocks and inflation inequality joint with Christoph Lauper, UNIL Working Paper Series, November 2021

Abstract: We evaluate household-level inflation rates since 1980, for which we compute various dispersion measures, and assess their reaction to monetary policy shocks. We find that (i) contractionary monetary policy significantly and persistently decreases inflation dispersion in the economy, and that (ii) different demographic groups are heterogeneously affected by monetary policy. Due to different consumption bundles, middle-income households experience higher median inflation rates, which at the same time are more reactive to a contractionary monetary policy shock, leading to an overall convergence of inflation rates between income groups. These results imply that (iii) the impact of monetary policy shocks on expenditure inequality is between 20 and 30% more muted once we control for differences in individual inflation rates.

A monetary policymaker faces uncertainty. Speech by Catherine L Mann, BoE. April 2022. 

Does the G-SIB framework incentivise window-dressing behaviour? Evidence from G-SIBs and reporting banks with Markus Behn, Laura Parisi, and Michael Wedow. ECB Macroprudential Bulletin, October 2018 issue.

Assessing the macroeconomic impact of the EIB Group. Joint Research paper between the European Investment Bank (EIB) and the Joint Research Centre (JRC) of the European Commission. June 2018.