Work in progress 

Time-Varying Attention and its Consequences for Monetary and Fiscal Policy, with Stefan Girstmair

Download current draft here

What are the consequences of agents' time-varying attention to the future for business cycle dynamics, monetary and fiscal policy? What drives attention? How good (or wrong) is the standard assumption of behavioral macroeconomic models that attention is constant? 

To answer these (and other) questions we estimate a behavioral New Keynesian model a la Gabaix (2020) in which the cognitive discounting parameter governing expectation formation varies over time. Utilizing new Bayesian MCMC methods on U.S. data from 1970 to 2025, we find substantial time variation in attention. The estimated series co-moves with inflation expectations, measures of forecast disagreement and macroeconomic uncertainty, increasing markedly during periods of heightened economic volatility. Time-varying attention has important macroeconomic implications:

• Due to time-varying attention the effectiveness of monetary and fiscal policies for stabilizing the economy varies over time in opposite directions.  As a result their relative effectiveness varied historically by a factor of 2, 

• Time-varying attention has a bearing impact on business cycle dynamics as well. In periods of persistently high attention (in particular in the late 1970s and early 1980s) economic volatility was substantially increased. In contrast falling attention in the following years helped to lower volatility and bring about the Great Moderation in the US economy,

• Attention is affected by economic conditions, it co-moves with inflation (or its expectations) and macroeconomic uncertainty,

• Attention is not directly observable. However, since its drivers are observable in real time, this finding may provide guidance for policymakers as to changes in the aforementioned effectiveness of policy.

The redistributive power of business cycle fluctuations, with Marcin Bielecki & Marcin Kolasa

Published as SGH Working paper

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How do business cycle fluctuations redistribute welfare between cohorts? Is this redistribution quantitatively important? What are the channels through which it occurs and how are they affected by monetary policy? 

To answer these (and other) questions, we construct a New Keynesian life-cycle model and estimate it for the US. We find that cyclical fluctuations are an important source of redistribution - for many cohorts and years their impact on welfare reached more tham 30% of annual consumption. More importantly, these effects do not tend to net out over a typical life cycle: some cohorts (e.g. born in the 1950s) have been historically substantially less lucky than others (see figure below). Shocks that drive the cycle can be split into two groups: those that affect all cohorts' welfare in the same direction and those that create both winners and losers. Monetary policy shocks belong to the latter group and hence play an overproportional role in driving intergenerational redistribution. Systematic monetary policy has the ability to affect redistribution as well - more active policy raises the amount of redistribution.

The Great Redistribution that Wasn’t: a HANK-OLG Perspective on Monetary Policy, with Rodolfo Rigato (ECB)

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Published as ECB Working Paper

The European Central Bank reacted relatively late to the post-pandemic inflation surge. We check how this decission affected the redistribution caused by macroeconomic developments. To do so, we construct and estimate a two-asset Heterogeneous Agent New Keynesian model with an overlapping generations structure.

Here are our findings: 

• monetary policy has a strong ability to redistribute and to affect redistribution caused by other forces

• macroeconomic shocks that hit the euro area (and in particular drove inflation) between 2021 and 2022 redistributed heavily from young and poor to old and rich households

• the relatively late reaction of the central bank almost perfectly undid the redistribution

• this, however was achieved by a strong deviation from a monetary policy rule. Responding in line with a standard monetary policy rule cannot prevent redistribution caused by cost-push shocks.

For whom the bill tolls: redistributive consequences of a monetary-fiscal stimulus, with Julia Jabłońska, Marcin Kolasa & Krzysztof Makarski

Published as ECB Working Paper 

SUERF policy brief

During the COVID-19 pandemic, governments in the euro area sharply increased spending while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers) but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, and assuming that  the deficit was partly unfunded by future taxes, we document that young households benefited from the stimulus, while middle-aged and older agents mainly paid the bill. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, the welfare of some actually decreased

Monetary Integration under Bounded Rationality, with Paweł Galiński & Krzysztof Makarski

Download a very, very preliminary version here

What would have happened if Poland joined the euro area several years ago? Would macroeconomic volatily rise or fall? How about inflation? Does it matter at which exchange rate accession happens? What is the main driver of the consequences: fixing the exchange rate or adopting a common interest rate? Can fiscal policy effectively substitute for lost monetary independence? What are the consequences of recognizing that agents are not necessarily rational? We answer all these questions using a two-economy model of Poland and the euro area with non-rational expectations a la Gabaix (2020). 

Here are some answers: 

• monetary integration would have substantially amplified output volatility, while making inflation more stable,

• we show that the consequences of joining are almost entirely due to fixing the exchange rate, while the role of adopting a common interest rate is very small,

• we document the key role of the exchange rate at entry. An undervalued currency delivers a boom and bust cycle and inflationary pressures, while an overvalued one leads to a deep, prolonged downturn and deflation. 

• under plausible assumptions about its activity fiscal policy is unable to restore macroeconomic stability attainable under an independent monetary regime. 

• behavioral expectations fit the data much better than rational expectations and limit somewhat the estimated cost of joining the currency union.