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.

Supply-driven energy price shocks generate substantial consumption inequality. Using US household expenditure data and instrumental variable local projections, we show that a one percentage point energy price increase reduces consumption of households in the lowest income decile by 0.5 percent, while consumption of those in the highest decile remains unchanged. This differential response persists for up to one year and reflects both higher energy expenditure shares and tighter liquidity constraints among low-income households. A two-agent New Keynesian model with two production sectors (energy and non-energy) and non-homothetic household preferences replicates these patterns and provides a framework for policy evaluation. At comparable fiscal cost (0.08 percent of GDP over two years), targeted cash transfers fully offset the consumption inequality increase, while energy subsidies reduce it by only half. Cash transfers dominate because they enable constrained households to allocate resources optimally across all consumption categories, whereas subsidies are restricted to energy expenditure. These findings inform the design of fiscal responses to relative price shocks affecting necessity goods.

We study the propagation of unfunded fiscal shocks in a currency union. For a determinate equilibrium, at most one fiscal authority can issue unfunded debt; we then accommodate multiple partially unfunded countries by introducing monetary-led and fiscal-led parallel economies. Funded government spending shocks cause inflation to diverge across countries, while unfunded shocks raise inflation union-wide, as the common central bank accommodates fiscal inflation. Euro area local projections show that positive government spending shocks in France and Italy raise inflation abroad, while in Germany they lower inflation abroad, consistent with French and Italian shocks being primarily unfunded and German shocks being primarily funded. A Bayesian-estimated quantitative model confirms that unfunded fiscal shocks are a quantitatively significant driver of euro area inflation dynamics. We recover the implied inflation target of the ECB, which averages near two percent over the sample but rose above 2.5 percent during the post-pandemic episode due to fiscal pressures.

Online Appendix

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.

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.