Publications

Peer-reviewed Publications


  1. **NEW** "Non-Neutrality of Open-Market Operations", American Economic Journal: Macroeconomics, 12(3), 2020 (with P. Benigno)

Abstract. We analyze the effects on inflation and output of unconventional open-market operations due to the possible income losses on the central bank's balance sheet. We first state a general Neutrality Property, and characterize the theoretical conditions supporting it. We then discuss three non-neutrality cases. First, with no treasury's support, sizeable (current or expected ) balance sheet losses can undermine the central bank's solvency and should be resolved through an increase in inflation. Second, a central bank might also engineer higher inflation in the case it wants to limit or reduce losses because of political constraints or to seek more financial independence. Third, if the treasury is unable or unwilling to tax households to cover the central bank's losses, the wealth transfer to the private sector also leads to higher inflation.


  1. "Government Spending and the Exchange Rate", International Review of Economics and Finance, 54, pp. 55-73, 2018 (with G. Di Giorgio and G. Traficante)

Abstract. This paper studies the real exchange rate response to a government-spending shock in a two-country model with productive government purchases and non-Ricardian households. In this economy, the real exchange rate depreciates following an increase in domestic public spending, consistently with most empirical evidence. Importantly, and consistently with empirical evidence, the depreciation occurs both on impact and in the transition. The transmission mechanism works through an increase in domestic private-sector productivity, spurred by government purchases, which reduces real marginal costs at home allowing for accommodating monetary policy response.


  1. "Safe Assets, Liquidity and Monetary Policy", American Economic Journal: Macroeconomics, 9(2), pp. 1-47, 2017 (lead article, with P. Benigno)

Abstract. This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and "pseudo-safe" assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank's balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers.


  1. "Optimal Monetary Policy and Financial Stability in a non-Ricardian Economy", Journal of the European Economic Association, 14(5), pp. 1225-1252, 2016 - CORRIGENDUM

Abstract. I present a model with discontinuous asset-market participation (DAMP), where all agents are non-Ricardian, and where heterogeneity among market participants implies financial-wealth effects on aggregate consumption. The implied welfare criterion shows that financial stability arises as an additional and independent target, besides inflation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and inflation may be optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants may lead monetary policy to induce substantially higher welfare losses.


  1. "Fiscal Shocks and the Exchange Rate in a Generalized Redux Model", Economic Notes, 44(3), pp. 419-435, 2015 (with G. Di Giorgio and G. Traficante)

Abstract. This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange-rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff (1995). We show that the joint presence of home bias in public consumption and endogenous monetary policy overturns the result of the Redux model implying an exchange-rate appreciation in response to an expansionary fiscal shock.


  1. "Learning, Monetary Policy and Asset Prices", Journal of Money, Credit and Banking, 47(7), pp. 1273-1307, 2015 (with M. Airaudo and L.F. Zanna)

Abstract. We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New Keynesian DSGE model where the presence of non-Ricardian households makes stock prices nonredundant for the business cycle. We find that responding to stock prices enlarges the policy space for which the equilibrium is both determinate and E-stable (learnable). In particular, the Taylor principle ceases to be necessary, and determinacy/E-stability is granted also by mildly passive policy rules. Our results appear to be more prominent in economies featuring a lower elasticity of substitution across differentiated products and/or more rigid labor markets.


  1. "Second-Order Approximation of Dynamic Models with Time-Varying Risk", Journal of Economic Dynamics and Control, 37(7), pp. 1231-1247, 2013 (lead article, with G. Benigno and P. Benigno) - MATLAB codes

Abstract. This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally linear model in which risk is still time-varying but has no distinct role – separated from the primitive stochastic disturbances – in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.


  1. "Productivity Shocks, Stabilization Policies and the Dynamics of Net Foreign Assets", Journal of Economic Dynamics and Control, 37(1), pp. 210-230, 2013 (with G. Di Giorgio)

Abstract. In this paper we investigate the role of macroeconomic stabilization policies for the international transmission of productivity shocks and their effects on the external sector. We develop a two-country stochastic Dynamic New-Keynesian “perpetual youth” model of the business cycle with incomplete international financial markets. Our OLG structure implies stationary net foreign asset dynamics and allows for a thorough analysis of the interaction of monetary policy with non-balanced budget fiscal policy. We derive the dynamic and cyclical properties of fiscal deficit feedback rules and their implications for net foreign assets dynamics. Our results imply that the degree of “fiscal discipline”, i.e. the extent to which the fiscal rule responds to debt dynamics, is crucial for the dynamics of net foreign assets. We show that under a counter-cyclical fiscal rule with low fiscal discipline temporary positive productivity shocks may result in substantial deteriorations of the Net Foreign Asset position in the medium run. This result crucially hinges on the interplay among nominal rigidities, non-balanced budget fiscal policy, and the wealth effects on consumption that are implied by our OLG structure.


  1. "Monetary Policy and Stock-Price Dynamics in a DSGE Framework", Journal of Macroeconomics, 34(1), pp. 126-146, 2012

Abstract. This paper analyzes the role of stock prices in driving monetary policy for price stability in a non-Ricardian DSGE model. It shows that the dynamics of the interest rate consistent with price stability requires a response to stock-price changes that depends on the shock driving them: a supply shock (e.g. productivity) does not require an additional, dedicated response relative to the standard Representative-Agent framework, while a demand shock does. Moreover, we show that implementing the flexible-price allocation by means of an interest-rate rule that reacts to deviations of the stock-price level from the flexible-price equilibrium incurs risks of endogenous instability that are the higher the less profitable on average equity shares. On the other hand, reacting to the stock-price growth rate is risk-free from the perspective of equilibrium determinacy, and can be beneficial from an overall real stability perspective.


  1. "Risk, Monetary Policy and the Exchange Rate", NBER Macroeconomics Annual 2011, Volume 26, pp. 247-309, 2012 (with G. Benigno and P. Benigno)

Abstract. In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coefficient in the UIP regression.


  1. "International Portfolio Allocation under Model Uncertainty", American Economic Journal: Macroeconomics, 4(1), pp. 144-189, 2012 (with P. Benigno)

Abstract. This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle.


  1. "Stock Market Conditions and Monetary Policy in a DSGE Model for the US", Journal of Economic Dynamics and Control, 34(9), pp. 1700-1731, 2010 (with E. Castelnuovo)

Abstract. This paper investigates the interactions between stock market fluctuations and monetary policy within a DSGE model for the U.S. economy. First, we design a framework in which fluctuations in households financial wealth are allowed—but not necessarily required—to exert an impact on current consumption. This is due to the interaction, in the financial markets, of long-time traders holding wealth accumulated over time with newcomers holding no wealth at all. Importantly, we introduce nominal wage stickiness to induce pro-cyclicality in real dividends. Additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate our model. We fit our model to post-WWII U.S. data, and report three main results. First, the data strongly support a significant role of stock prices in affecting real activity and the business cycle. Second, our estimates also identify a significant and counteractive response of the Fed to stock-price fluctuations. Third, we derive from our model a microfounded measure of financial slack, the “stock-price gap”, which we then contrast to alternative ones, currently used in empirical studies, to assess the properties of the latter to capture the dynamic and cyclical implications of our DSGE model. The behavior of our “stock-price gap” is consistent with the episodes of stock-market booms and busts occurred in the post-WWII, as reported by independent analyses, and closely correlates with the current financial meltdown. Typically employed proxies of financial slack such as detrended log-indexes or growth rates show limited capabilities of capturing the implications of our model-consistent index of financial stress. Cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed.


  1. "Trend Growth and Optimal Monetary Policy", Journal of Macroeconomics, 32(3), pp. 797-815, 2010 (with F. Mattesini)

Abstract. This paper analyzes the optimal behavior of the Central Bank in an economy characterized by balanced growth. We show how trend-growth affects the dynamics of inflation, the preferences of a welfare-maximizing Central Bank and optimal monetary policy. In particular, we show that the optimal monetary policy response to cost-push shocks is not invariant to trend growth, and that countries with lower trend growth have substantially higher incentives to commit to simple rules, both from a welfare and price-stability perspectives.


  1. "Monetary Policy and Stock Prices in an Open Economy", Journal of Money Credit and Banking, 39(8), pp. 1947-1985, 2007 (with G. Di Giorgio)

Abstract. This paper studies monetary policy in a two-country model where agents can invest their wealth in both stock and bond markets. In our economy the foreign country hosts the only active equity market where also residents of the home country can trade stocks of listed foreign firms. We show that, in order to achieve price stability, the Central Banks in both countries should grant a dedicated response to movements in stock prices driven by relative productivity shocks. Determinacy of rational expectations equilibria and approximation of the Wicksellian interest rate policy by simple monetary policy rules are also investigated


  1. "The Welfare Loss from Unstable Inflation", Economics Letters, 96(1), pp. 51-57, 2007

Abstract. The Calvo price-setting mechanism produces relative-price dispersion among firms, while the Rotemberg model is consistent with a symmetric equilibrium. Nonetheless, both models imply the same welfare costs of inflation and the same prescriptions for welfare-maximizing Central Banks.


Other Publications


  1. **NEW** "La Moneta, tra un Passato di Metallo e un Futuro Digitale", 34° Rapporto Italia 2022, pp. 663-678. Soveria Mannelli: Rubbettino Editore, 2022 - link to WP version


  1. "Criptovalute, Sovranismo e Sistema Monetario", Individuo, Libertà e Potere - Studi in Onore di Lorenzo Infantino, edited by R. Cubeddu and P. Reichlin, pp. 73-87. Soveria Mannelli: Rubbettino Editore, 2019 - link to WP version


  1. "Suona la campana per la BCE", Rivista Bancaria Minerva Bancaria, Anno LXX, n. 2/3, 2014 (with G. Di Giorgio)


  1. "Fiscal Deficits, Current Account Dynamics and Monetary Policy", MEF Department of the Treasury WP No. 8, 2008 (with G. Di Giorgio)


  1. "Modello Neo-Keynesiano Dinamico", in Bankpedia Review, 1 (1), 2011


  1. "Mundell-Fleming Model", Bankpedia, E-encyclopedia of Banking, Stock Exchange and Finance, 2011


  1. "Dynamic New-Keynesian Model", Bankpedia, E-encyclopedia of Banking, Stock Exchange and Finance, 2010


  1. "Monetary Policy and Stock Prices: Theory and Methods", in Monetary Policy and Institutions, edited by G. Di Giorgio and F. Neri, Rome: Luiss University Press. 2006


  1. "Dall’Euforia alla Crisi: Etica e Fiducia nei Mercati Finanziari", in Intermediari e Mercati Finanziari, edited by G. Di Giorgio and C. Di Noia, Bologna: Il Mulino. 2004


  1. "Recensione di ‘The Prudential Regulation of Bank’, di Mathias Dewatripont e Jean Tirole", Rivista di Politica Economica, Anno XC, Serie III, 2000


  1. "La trasmissione della politica monetaria tra intermediari finanziari e imprese", Rivista Bancaria, Anno LV, n. 2, 1999


  1. "L’impostazione di una politica monetaria comune: l’eterogeneità territoriale del sistema industriale europeo e l’asimmetria nella trasmissione degli impulsi monetari", 18° Rapporto sui mercati monetari e creditizi, OCSM, LUISS-Guido Carli, 1999



Books


Problemi di Economia e Politica Monetaria (2nd Edition), Wolters Kluwer - Cedam 2017. (with G. Di Giorgio, A. Pandimiglio, and G. Traficante) ISBN 978-88-13-36302-4


Problemi di Economia e Politica Monetaria, Padova: Cedam 2005. (with G. Di Giorgio and A. Pandimiglio) ISBN 88-13-25916-6