A hopefully user-friendly overview

Monetary integration—such as adopting the euro—offers clear benefits: lower transaction costs, exchange rate stability, and closer integration with core economies. However, for catching-up countries with higher natural interest rates, it also poses a hidden macroeconomic risk: boom-bust cycles driven by overly loose monetary conditions. I belonged to first economists who wrote about this phenomenon (even before it happened, see Brzoza-Brzezina 2005) and conducted several research studies to investigate whether and how boom-bust cycles can be prevented. 

The boom-bust cycle:

• Interest Rate Mismatch: When a fast-growing country joins a currency union, it imports the interest rate of the union, which may be too low relative to its own economic fundamentals. This mismatch fuels excessive borrowing and investment.
  
  

• Boom Phase: Cheap credit leads to rapid increases in consumption, housing prices, and investment, often outpacing productivity gains. Financial institutions, facing few constraints, amplify these trends.
  
  

• Bust Phase: Eventually, imbalances become unsustainable. Asset prices fall, credit contracts, and output declines—often severely, as the country lacks independent monetary tools to respond.
  
  

• Historical developments: such boom-and-bust episodes occured in several member countries of the euro area, including Spain, Ireland, Lithuania, Latva and Estonia. 

• Poland and the euro area:  Poland's (potential) accession to the euro area is a clear case of potentially severe boom-bust developments. Poland's natural rate of interest is 2-3 percentage points higher than that of the euro area. Convergence is expected not earlier than in the mid 2030s. (Bielecki et al. 2024)
  
  

Policy Implications: To avoid such cycles, countries should strengthen financial regulation and macroprudential tools before joining a monetary union. Coordination with fiscal policy is also critical (Brzoza-Brzezina, Jacquinot, Kolasa 2014, Brzoza-Brzezina, Kolasa, Makarski 2015, Bielecki et al 2019). The safest option is, however, to postpone accession until natural interest rates converge significantly.

Literature (my contribution to the topic):

1. Brzoza-Brzezina, Michał, 2005. "Lending booms in the new EU Member States: will euro adoption matter?," Working Paper Series 543, European Central Bank.

2. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2015. "Macroprudential policy and imbalances in the euro area," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 137-154. 

3. Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, vol. 25(1), pages 35-69, February.

4. Marcin Bielecki & Michał Brzoza‐Brzezina & Marcin Kolasa & Krzysztof Makarski, 2019. "Could the Boom‐Bust in the Eurozone Periphery Have Been Prevented?," Journal of Common Market Studies, Wiley Blackwell, vol. 57(2), pages 336-352, March.

5. Marcin Bielecki & Michał Brzoza-Brzezina & Aneta Błażejowska & Kamila Kuziemska-Pawlak & Grzegorz Szafrański, 2024. "Estimates and Projections of the Natural Rate of Interest for Poland and the Euro Area," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 1-32.

How do macroeconomic policies and business cycle fluctuations redistribute welfare across generations and income groups? These are important questions both from the normative and positive perspective. I believe that distributional concerns should become deeply integrated into mainstream macroeconomic policy analysis, with age playing an important dimension of heterogeneity. By developing and estimating dynamic life-cycle models, I intend to provide both tools and results to assess who gains, who loses, and what policy can do about it, across the spectrum of macroeconomic policies and fluctuations.

1. Life-Cycle Structure as a Foundation for Distributional Analysis

I use richly specified overlapping generations (OLG) models with real and nominal frictions and (in most recent work) with idiosyncratic income shocks that capture heterogeneity in income, wealth, and asset composition. These models depart from representative-agent or infinite-horizon frameworks, allowing for:

• Explicit modeling of retirement, asset decumulation, and mortality risk.
  
  

• Realistic asset portfolios, including nominal vs. real assets, housing, and debt.
  
  

• Analysis of remaining lifetime utility across cohorts—crucial for identifying welfare redistribution.
  
  

This perspective shows how aggregate shocks (e.g., monetary expansions or contractions) can have asymmetric welfare effects, depending on household age, income sources, and portfolio maturity structures.

2. Redistribution due to Monetary and Fiscal Policy

A central theme are the redistributive consequences of macroeconomic policy instruments, particularly:

• In Bielecki, Brzoza-Brzezina & Kolasa (2022) we show that a monetary policy easing typically benefits younger households (borrowers, workers) at the expense of older savers holding nominal assets.
  
  

• In Brzoza-Brzezina, Jabłońska, Kolasa & Makarski (2024) we show that a fiscal stimulus, especially when partially unfunded and accommodated by monetary policy, can exacerbate inflation and thus impose an inflation tax on older households with nominal wealth, while aiding younger ones.

• In Brzoza-Brzezina & Rigato (2025) we show that the the belated reaction of the ECB to the 2021-22 inflation surge prevented a heavy redistribution of welfare from poor to rich households. 
  
  

What distinguishes all the above papers is their focus on indirect (general equilibrium) redistribution channels. For instance, even if fiscal transfers are evenly distributed, macroeconomic adjustments—via inflation, interest rates, and asset prices—can reverse the net welfare impact for many groups.

3. Business Cycles as a Source of Systematic Redistribution

In Bielecki, Brzoza-Brzezina & Kolasa (2025) we extend the analysis from policy shocks to the business cycle itself:

• Different cohorts experience unequal welfare gains or losses from cyclical fluctuations, depending on their labor market status or asset positions.
  
  

• Some generations are systematically "luckier" than others, benefiting from favorable shocks during prime working or saving years.
  
  

• Crucially, monetary policy shocks, though small in output variance terms, play a disproportionately large role in intergenerational redistribution.
  
  

This work shows that redistribution from business cycles does not wash out over the life cycle and can cumulate into large, persistent welfare gaps between cohorts. In other words we show the importance of analysing first-order welfare effects of business cycle fluctuations. The literature so far has ignored these effects, assuming that they cancel out in the long run (as they do under the standard assumption of infinitely-lived agents).  

Policy Implications and Normative Insights

• The effectiveness and fairness of fiscal stimulus measures depend on their funding structure (e.g., whether future taxes offset the stimulus or not).

• There exists a policy trade-off between aggregate stabilization and distributional effects.

• Monetary policy is strongly redistributive, but it remains an open question whether policymakers should take this fact into account.
  
  

Literature: my contributions to the topic:

1. Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2022. "Intergenerational Redistributive Effects of Monetary Policy" Journal of the European Economic Association, European Economic Association, vol. 20(2), pages 549-580.

2. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof & Jabłońska, Julia, 2024. "For whom the bill tolls: redistributive consequences of a monetary-fiscal stimulus," Working Paper Series 2998, European Central Bank. 

3. The redistributive power of business cycle fluctuations, with Marcin Bielecki & Marcin Kolasa, available soon

4. Inflation, monetary policy and redistribution in an OLG-HANK model, with Rodolfo Rigato, available soon

I explore (with co-authors of course) how population aging, fertility trends, technology growth and migration affect the economy. Of particular interest is the impact on the equilibrium (natural) real interest rate and the implications for monetary policy. We show that it is essential for central banks to take demographic trends into account, otherwise they risk conducting suboptimal policy. Here's a concise overview: 

1. Demographics as a Main Driver of NRI Decline 

• We find that population aging has been the key factor behind a multi-decade decline in the natural real interest rate (in both Poland and the euro area)—accounting for about two‑thirds of the total drop since the mid-1980s  (Bielecki, Brzoza-Brzezina & Kolasa 2020) 
  
  

• This demographic effect stems from longer life expectancy and lower fertility, which shift household saving and investment behavior.
  
  

• Euro Area: Aging has already lowered NRI by approximately 2 pp between 1980 and 2025. 

• Poland: Aging alone is projected to reduce NRI by ~1.5 percentage points over a 40‑year span (2000–2040). While migration (notably from Ukraine) has some mitigating effect, its impact is relatively minor.  This is because migrants typically arrive with little assets and have to accumulate them, which pushes the equilibrium interest down.  (Bielecki, Brzoza-Brzezina & Kolasa 2022).
  
  

2. Challenges for Monetary Policy

• A falling natural rate raises the risk that nominal interest rates hit the zero lower bound (ZLB). (Bielecki, Brzoza-Brzezina & Kolasa 2023).
  
  

• In the euro area, demographic trends increased the ZLB risk from less than 0.5% in 1980 to almost 6% by 2025
  
  

• If central banks systematically overestimate the natural rate—due to delayed recognition of demographic changes—they risk setting too-tight policy, resulting in prolonged low inflation or deflation. This in turn, further raises the risk of deflationary episodes and hitting the ZLB.
  
  

4. Modeling Approach

• We develop New Keynesian overlapping-generations (life-cycle) models calibrated to household-level data, then simulate how demographics influence saving behavior, capital accumulation, equilibrium interest rates and inflation.
  
  

5. Policy Insights & Solutions

• Timely updates: Central banks should continually revise their estimates of NRI to account for demographic shifts, reducing policy mistakes and ZLB risk.
  
  

• Structural policy reforms: Possible responses include raising the retirement age which can help offset downward pressure on the natural rate.
  
  

• Immigration: While helpful, migration alone is insufficient to fully counter demographic headwinds.
  
  

Literature (my contributions to the topic):

Bielecki, Marcin & Brzoza-Brzezina, Michał & Kolasa, Marcin, 2020. "Demographics and the natural interest rate in the euro area," European Economic Review, Elsevier, vol. 129(C). 

Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2022. "Aging, Migration and Monetary Policy in Poland," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 5-30. 

Marcin Bielecki & Michał Brzoza‐Brzezina & Marcin Kolasa, 2023. "Demographics, Monetary Policy, and the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1857-1887, October. 

A standard assumption in mainstream macroeconomics is that people form expectations in a rational way (see e.g. Muth (1961), Lucas (1972), Kydland and Prescott (1982)). This means that they use all available information, know the true model of the economy and solve it to generate a forecast of future macroeconomic variables like output or inflation. 

However, a growing behavioral economics literature argues that people are prone to systematical cognitive biases that significantly affect their decision-making process. Kahneman and Tversky (1972) showed that while making judgments, people systematically deviate from the Bayesian probability distribution, a behavior they called heuristics. Heuristics are simplified processes of reasoning and decision-making based on ”rule of thumb” behavior used by all people on a daily basis. This phenomenon might generally be beneficial as it allows us to make quick decisions instead of conducting an in-depth analysis of each situation. However, as a consequence, forecasts need not be rational. Coibion and Gorodnichenko (2015) have shown that indeed macroeconomic forecasts deviate from rationality.

In this line of research (of course together with co-authors) I ask how deviations from the rational expectations assumption affects the basic laws of monetary economics. In particular, we assume that expectations are formed behaviorally instead of rationally (Gabaix, 2020). In simpler words, we assume that households are somewhat myopic :

1. is the assumption of behavioral expectations more or less in line with the data than rational expectations?

2. how does deviation from rational expectations affect the transmission of monetary policy?

3. how does it affect the impact of fiscal policy on the economy?

4. how does it affect the consequences of joining a monetary union?

5. does it help explain important macroeconomic puzzles?   

Here are some answers, for more questions, answers and details read the papers

1. yes, behavioral expectations find much more support in the data than rational expectations

2. if households form expectations behaviorally, monetary policy becomes less powerfull

3. if households form expectations behaviorally, fiscal policy becomes more powerfull

4. if households form expectations behaviorally, joining a monetary union is less costly (in terms of increased output volatility)

5. yes, behavioral expectations can for instance help explain the so called UIP puzzle. In models with rational expectations foreign exchange returns are unforcasteable. This is not in line with empirical observations. Under behavioral expectations one can forecast returns on foreign currency investments 

My contribution to the literature:

1. Brzoza-Brzezina, Michał & Galiński, Paweł R. & Makarski, Krzysztof, 2025. "Monetary and fiscal policy in a two-country model with behavioral expectations," Journal of International Money and Finance, Elsevier, vol. 155(C). 

2. Monetary Integration under Household Heterogeneity and Bounded Rationality, with Paweł Galiński & Krzysztof Makarski, mimeo, Narodowy Bank Polski