Research
Publications and working papers:
Deep Recessions, Slowing Productivity and Missing (Dis-)inflation in the euro area (joint with Martin Spitzer), European Economic Review, Vol.134, May 2021, 103708
Circulated previously as "Endogenous TFP, business cycle persistence and the productivity slowdown in the euro area"; ECB Working Paper 2401, 2020; Bank of Finland Research Discussion Paper 21/2019
This paper analyses the role of endogenous total factor productivity dynamics in explaining business cycle persistence as well as the missing (dis-)inflation and productivity puzzles in the euro area. We show by means of an estimated medium-scale DSGE model in which TFP evolves endogenously as the result of costly investment in R&D and technology adoption that the endogenous slowdown in total factor productivity can explain the depth and persistence of the output drop and the weak recovery following the double-dip recession in the euro area. Our results suggest that a decrease in R&D efficiency and innovation is key in explaining the pre-crisis euro area productivity slowdown, while as of 2008 a crises-induced drop in technology adoption constitutes the most important factor. We document a flattening of the Phillips curve relationship under the endogenous TFP mechanism, resulting from the interaction between inflation and productivity dynamics. The endogenous reaction in TFP dampens the inflation response over the business cycle and can thus help explain both the moderate fall in euro area inflation during its crises and its sluggish increase in the subsequent recovery.
Bank of Finland Research Discussion Paper 02/2024 .
This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Under debt-stabilizing (“passive”) fiscal policy the Taylor principle is not sufficient for determinacy. Instead, monetary policy should at least aim to raise r − g with persistent inflation in order to stabilize the expectations of households, firms and innovators. Endogenous growth provides a self-financing mechanism for deficits under active fiscal policy; growth provides some backing for the public debt, which reduces the need for debt-stabilizing inflation when current fiscal deficits are not backed by future fiscal surpluses. Because growth creates some fiscal space, a monetary policy that adheres to the Taylor principle combined with active fiscal policy can yield a unique stable equilibrium, provided that the policy permits r−g to fall with inflation.
Do Recessions Slow Technology Growth? Evidence from the Firm Level, with Olga Goldfayn-Frank and Tobias Schmidt
This paper presents firm-level empirical evidence on technology-enhancing investment in a crisis using a unique, representative survey of German firms and shows the persistent effects of economic contractions on potential output at the micro level. Our data features rich information on pre-crisis plans and actual investment in R&D and technological diffusion and thus identifies the crisis-induced change in innovation investment on both margins. We show that 25% of firms cut their R&D investment and 20% technology diffusion investment respectively. The innovation cuts are sizeable, with a mean R&D decrease of -65% (-750,000€) of pre-crisis plans in R&D and -70% (-954,000€ ) in diffusion respectively. We estimate that a 1% cyclical output drop translates into a cut of firms’ innovation investment of about -0.3%. Demand shocks are identified as a key driver of firms’ decrease of innovation investment. We rationalize our empirical results in a New Keynesian model with endogenous technology growth through R&D and technological diffusion which we utilize to demonstrate macroeconomic dynamics and aggregate TFP patterns, as well as alternative recession scenarios and potential amplification from financial frictions. Our results speak against the traditional dichotomy between cycle and trend and the conventional assumption that fluctuations in short-run demand do not affect long-term potential output.
Bank of Finland Research Discussion Paper 13/2022 .
This paper studies fiscal policy in a New Keynesian DSGE model with endogenous technology growth in which scarring can occur endogenously through hysteresis effects in TFP. Both demand- and supply-driven recessions can weaken investment in R&D and technology adoption, thus depressing the long-run trend. Fiscal policy has long-term effects under endogenous growth and the type of fiscal stimulus is decisive for the sign and magnitude of fiscal multipliers. Expansionary government spending boosts output transitorily but over time crowding out in technology-enhancing investment weakens the long-run trend. I introduce fiscal growth policies in this environment which in the short run raise aggregate demand and simultaneously support growth-enhancing investment and thus the long-run path of aggregate output, generating a positive trend multiplier. Multipliers of fiscal growth policies can be sizeable, above all when targeted to R&D, which is characterized by fiscal multipliers greater than unity. Fiscal growth policies are disinflationary and are thus effective stabilization tools in supply-driven recessions when monetary policy faces a trade-off between inflation and short- and long-run output stabilization.
ECB Working Paper No 2714; Bank of Finland Research Discussion Paper 6/2022.
This paper studies monetary policy strategies under endogenous technology dynamics and low r* . Endogenous growth strengthens the gains from make-up strategies relative to inflation targeting, especially if policy space is reduced. This result is due to the long-run non-neutrality of money and the hysteresis effects in TFP through which ELB episodes generate permanent scars on long-run aggregate supply. Make-up strategies not only foster the alignment of inflation with target but also support productivity-improving investment in R&D and technology adoption and hence the long-run trend path, provided that the inherent make-up element is sufficiently pronounced. Inflation is less responsive to monetary policy due to the interaction with productivity dynamics. As a result, additional stimulus is required at the ELB and the degree of subsequent overshooting is alleviated. Endogenous growth also generates novel monetary policy trade-offs, most notably credibility challenges, which can be mitigated by confining make-up elements to ELB episodes.
Revised version in progress
This paper presents a two-country endogenous growth model with nominal wage rigidities for a currency union in which pessimistic expectations can generate permanent slumps with low growth and persistent unemployment. Stagnation evolves as a growth trap when nominal interest rates are constrained: Monetary policy cannot restore full employment as weak growth depresses aggregate demand which pushes its policy instrument against the constraint. Growth is low, in turn, as weak aggregate demand lowers firm profits and hence investment in R&D. The currency union can settle in a symmetric stagnation steady state in which weak aggregate demand in the currency union drives interest rates against the ZLB, generating persistent unemployment and low technology growth on the monetary union level. My results show that in addition an individual member state of sufficiently small size can enter a stagnation steady state asymmetrically, while the rest of the currency union maintains full employment and sound technology growth, as the central bank faces constraints given its responsibility for the currency union aggregate. I derive growth-promoting policies and show that bilaterally implemented R&D subsidies are effective in preventing stagnation in the currency union.
Bank of Finland Research Discussion Paper , NEW VERSION COMING UP.
I propose a two-sector endogenous growth model with heterogeneous sectoral productivity and sector-specific, nonlinear hiring costs to analyse the link between sectoral resource allocation, low productivity growth and stagnant real wages. My results suggest that an upward shift in the labor supply, triggered for instance by a labor market reform, is beneficial in the long-run as it raises growth of technology, labor productivity and real wages. I show, however, that in the immediate phase following the labor supply shock, labor productivity and real wages stagnate as employment gains are initially disproportionally allocated to low-productivity sectors, limiting the capacity for technology growth and depressing real wages and productivity. I demonstrate that due to the learning-by-doing growth externality in the high-productivity sector the competitive equilibrium is inefficient as firms fail to internalize the effect of their labor allocation on aggregate growth. Subsidies to high-productivity sector production can alleviate welfare losses along the transition path.
Work in progress:
Recessions as Accelerators of Structural Change, with Christian Siegel
Potential Output and Sectoral Reallocation under Heterogeneous Sectoral Growth, with Sebastián Amador
Discussions (selected):
Billi, Galí and Nakov: "Optimal Monetary Policy with r*<0", Paris School of Economics Macro Days, 2022.
Clymo and Rozsypal: "Firm Cyclicality and Financial Frictions”, 6th Annual Workshop of ESCB Research Cluster 2, Athens, 2022.
Adam, Reinelt and Pfäuti: "Subjective Housing Price Expectations, Falling Natural Rates and the Optimal Inflation Target" , Bundesbank and Banque de France Joint Spring Conference, Eltville, 2022.
Bianchi, Melosi and Rogantini Picco: “Who is Afraid of Eurobonds?”, 5th Annual Workshop of ESCB Research Cluster 2, virtual, 2021.
Carnicelli: “Public Employment Flows Over the Life Cycle”, Annual Meeting of the Finnish Economic Association, Tampere, 2020.
Eggertsson, Mehrotra and Robbins: "A Model of Secular Stagnation: Theory and Quantitative Evaluation",
CEPR/ Bank of Finland Conference on Demographics and the Macroeconomy, 2017.
Fornaro and Romei: “The Paradox of Global Thrift'', Nordic Summer Symposium in Macroeconomics, Smögen, 2017.
Policy articles (selected):
SUERF Policy Brief No 550;
Review of Macroeconomic Modelling in the Eurosystem: Current Practices and Scope for Improvement (with Darracq Pariès et al.)
ECB Occasional Paper No. 202167
This paper provides an assessment of the macroeconomic models regularly used for forecasting and policy analysis in the Eurosystem. These include semi-structural, structural and time-series models covering specific jurisdictions and the euro area within a closed economy, small open economy, multi-country or global setting. Models are used as analytical frameworks for building baseline projections and for supporting the preparation of monetary policy decisions. The paper delivers four main contributions. First, it provides a survey of the macroeconomic modelling portfolios currently used or under development within the Eurosystem. Second, it explores the analytical gaps in the Eurosystem models and investigates the scope for further enhancement of the main projection and policy models, and the creation of new models. Third, it reviews current practices in model-based analysis for monetary policy preparation and forecasting and provides recommendations and suggestions for improvement. Finally, it reviews existing cooperation modalities on model development and proposes alternative sourcing and organisational strategies to remedy any knowledge or analytical gaps identified.
Bank of Finland Bulletin 4/2019;
Kansantaloudellinen aikakauskirja, Vol. 116, 1/2020