We study the macroeconomic and fiscal effects of targeted transfers toward unemployed households. For this purpose, we construct a New Keynesian model where heterogeneous households face idiosyncratic unemployment risk in a search and matching labour market. By assuming a zero liquidity economy, household distribution is degenerate and the model is easily tractable. In the wake of the Federal Pandemic Unemployment Compensation program, we show that targeted transfers generate a positive fiscal multiplier. This multiplier is higher when the expected employment exit probability is structurally or transitory large. The key mechanism works trough the positive impact of transfer on the expected marginal utility of employed agents.
work in progress
Learning and supply shocks in a HANK economy
This paper revisits monetary policy in a heterogeneous agent New Keynesian model where agents use an adaptive learning strategy named recursive least square learning in order to form their expectations. Due to the households' finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not necessarily anchored to the rational expectation path. Households experience different histories which has non-trivial consequences on their individual learning processes. In this model, supply shocks generate precautionary saving and possible long-lasting deflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen those effects which is in contradiction with previously established representative agent results under learning. Nonetheless, only price level targeting appears to resolve most of the problem by better anchoring long run expectations of future utility flows.
Price setting frequency and the Phillips curveJoint with Emanuel GASTEIGER (TU Wien).
We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modelled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. As markups are countercyclical, the model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: (i) is consistent with micro data on price setting frequency; (ii) gives rise to an accelerating Phillips curve that is steeper during expansions and flatter during recessions; (iii) explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities inconsistent with micro data; (iv) largely improves the macroeconomic time series fit of a medium-scale NK model.
Social learning and monetary policy at the effective lower boundJoint with Jasmina ARIFOVIC (Simon Fraser University), Isabelle SALLE (Bank of Canada and University of Amsterdam) ,Gauthier VERMANDEL (Paris-Dauphine University and France Stratégie).
This paper develops a model that jointly accounts for the missing disinflation in the wake of the Great Recession and the subsequently observed inflation-less recovery. The key mechanism works through heterogeneous expectations that may durably lose their anchorage to the central bank (CB)'s target and coordinate on particularly persistent below-target paths. The welfare cost associated with persistent low inflation may be reduced if the CB announces to the agents its target or its own inflation forecasts, as communication helps coordinate expectations. However, the CB may lose its credibility whenever its announcements become decoupled from actual inflation.