My Research

What transmission channels drive the effect of monetary policy on consumption inequality? This paper investigates this question with tractable Two-Agent New Keynesian models with search-and-matching frictions and wage rigidities. I make a distinction between credit-constrained households and unconstrained households and find that an expansionary monetary policy shock decreases consumption inequality between those two households through three channels: (i) the income composition channel, through fluctuations in labor and profit income; (ii) the savings redistribution channel, through fluctuations in real interest rate; and (iii) the earnings heterogeneity channel, through fluctuations in unemployment. The results are in line with the empirical evidence.

Japan has faced rapid ageing, persistently low interest rates, sluggish growth, and deflation for decades. Concurrently, there has been a gradual convergence in productivity between young and elderly workers. This paper aims to explore the relationship between productivity, demographic shifts, and interest rates in Japan during the post-bubble era, using an overlapping generations two-agent New Keynesian (OTANK) DSGE model. The narrowing productivity gap between younger and older cohorts puts upward pressure on interest rates. Meanwhile, factors such as longer life expectancy and negative population growth rates exert downward pressure on interest rates. The latter effect dominates. A central bank that does not account for this when setting monetary policy may induce deflationary pressure in the economy. Important policy implications emerge: Enhancing worker productivity across workers' entire life-cycle and bridging the productivity gap between younger and older workers can help offset the decline in interest rates, and monetary policy ought to account for shifting demographics.

What is the effect of wage rigidities on the transmission of monetary policy to inequality? This paper investigates this question with a Two-Agent New Keynesian model with financially constrained and unconstrained households, and with search-and-matching frictions. I study the relative effects of the wage channel and the labour market channel in the transmission of conventional and unconventional monetary policy, and how these change with degrees of wage rigidity. My main result is that the stickier the wage, the more a contractionary monetary policy shock reduces consumption inequality, whether that is conventional monetary policy or quantitative tightening, driven by the wage channel.

The 2021/22 inflation surge, driven primarily by rising energy prices, disproportionately affected low-income households due to their higher budget share on necessities. This study examines how supply-driven energy price shocks impact consumption behavior across income groups in the United States, with a focus on the implications for consumption inequality. Using household expenditure data, we find that low-income households experience significantly larger consumption declines than high-income households, with most of the adjustment happening via energy and 'core' consumption. To explore consumption inequality and macroeconomic outcomes under alternative policy scenarios, we develop a two-agent New Keynesian model with non-homothetic preferences. We see that targeted fiscal transfers can help mitigate the deepening of consumption inequality, albeit at the cost of higher inflation and interest rates, pointing to an inflation-inequality dilemma.

This paper studies how funded and unfunded fiscal expansions propagate in a currency union. A funded fiscal expansion implies future tax adjustments, allowing the central bank to control inflation, whereas an unfunded one lacks such adjustments, requiring the central bank to accommodate fiscally driven inflationary pressures. In euro area local projections, fiscal expansions in Germany and Italy are inflationary domestically and in other countries, while fiscal expansions in France are not and are followed by a more contractionary monetary response. We interpret this heterogeneity through a model with partially unfunded debt in the spirit of Bianchi, Faccini, and Melosi (2023). In the model, funded fiscal expansions imply divergent inflation within the union, whereas unfunded fiscal expansions generate union-wide inflationary spillovers because monetary policy accommodates fiscal inflation. This mechanism maps closely to the empirical patterns. A quantitative extension provides the basis for ongoing estimation of the historical mix of funded and unfunded shocks across countries.

What is the optimal degree of exchange rate stabilization in an open economy? We revisit this classic question by introducing Diagnostic Expectations (DE) into a standard New Keynesian small open-economy model. DE is a departure from the Rational Expectations hypothesis which, through an overreaction of agents’ beliefs, generates additional endogenous macroeconomic volatility. As a first pass at disciplining the model with data, we find that the inclusion of DE can help resolve key empirical exchange rate puzzles identified in the literature such as the exchange rate disconnect and forward premium puzzles. In terms of optimal monetary policy, we find that the model with DE can alter the welfare rankings of selected exchange rate regimes established in earlier studies. In particular, under reasonable assumptions regarding the strength of DE, simulations suggest that an exchange rate peg could be welfare superior to a policy that targets consumer price index (CPI) inflation. Importantly, extreme model parameterizations are not needed to justify exchange rate stabilization.