Research

Does monetary policy face a trade-off between stabilising inflation and unemployment as soaring energy prices hit the unemployed harder than the employed? Data from the euro-area Consumer Expectations Survey show that the jobless not only consume less but also devote a higher proportion of their consumption to energy. I account for this evidence into a tractable heterogeneous-agent New Keynesian model with labour market frictions and energy as a complementary input in production and as a non-homothetic consumption good: the unemployed consume less due to imperfect job-loss insurance and, since preferences are non-homothetic, allocate a larger share of this lower consumption to energy. The heterogeneous exposure of the labour force to rising energy prices induces an endogenous trade-off for monetary policy, whose optimal response involves partly accommodating inflation to limit the increase in unemployment and, therefore, prevent workers from becoming more exposed to the shock by losing their jobs.

Previous versions: [SSRN, Jun. 2024] [Bank of Italy Working Paper No. 1450, Mar. 2024].

Awards: Finalist for the QCGBF 2024 Young Economist Prize.

Coverage: centralbanking.com (Mar. 2024, Apr. 2024, Jul. 2024); SUERF Policy Brief No. 899 (Jun. 2024); ECB Monetary Policy Strategy Assessment 2025; Faculti.net interview; Antevorta Foundation (Apr. 2026); Keynote address by FRB Vice Chair for Supervision M. W. Bowman at the Reykjavík Economic Conference (May 2026).

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We examine the extent to which labor market reforms of temporary contracts introduced in Italy at the beginning of the century influenced aggregate productivity via their effects on allocative efficiency. Using firm-level data from the Italian manufacturing sector, we compute the extent of resource allocation by the covariance between firm size and productivity, and we identify the impact of the reforms by exploiting the variation in their implementation across sectors and regions. Our results suggest that the reform of apprenticeship contracts has increased the size-productivity covariance, and this aggregate effect can be rationalized through a theoretical model where the apprenticeship contract reform allows highly productive firms to gain market shares by improving their training efficiency, and by inducing them to turn a higher fraction of apprentices into permanent workforce. By contrast, the deregulation of the use of fixed-term contracts shows heterogeneous effects, with negative results among regions with long labor court disputes, and positive ones among those with less lengthy settlement procedures. The legal uncertainty associated with the reform might have reduced the incentive to use fixed-term contracts for productive firms located in regions where judicial disputes take longer to be settled.

Previous version: [DEM Working Paper No. 2020/1].

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