Research

Soft-Landing or Inflation Scares

• • We discuss the timing and strength of the Fed's reaction to the recent inflation surge within an estimated micro-founded macroeconomic model with heterogeneous expectations. Our model encompasses a time-varying cross-sectional distribution of subjective inflation forecasts that can persistently drift away from the central bank target. We obtain a closed-form solution that we estimate using Bayesian techniques on both US macroeconomic time series and forecast data from the Survey of Professional Forecasters. Counterfactual simulations suggest that the timing -  rather than the strength - of the policy reaction to this inflation surge is critical for anchoring inflation expectations and preventing the entrenchment of above-target inflation. We show that the Fed fell behind the curve in 2021  since an earlier tightening could have reduced the inflation peak without triggering a recession. However, further delays would have unanchored inflation expectations, strengthened the inflation surge, and entailed larger output losses.

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Subjective Models of the Macroeconomy and Average Inflation Targeting

•  An average inflation targeting (AIT) central bank adjusts policy when a moving average of recent inflation  rates deviates from the long-run target inflation rate.  It remains an open question whether there are desirable features for the central bank to be transparent about its averaging window, or whether there are gains to remaining ambiguous about the AIT.  This paper investigates the implications of an ambiguous average inflation target in an environment where agents do not hold rational expectations.  We develop a microfounded model where agents entertain multiple, subjective models of the law of motion of the economy.  The models differ based on whether they give precedence to demand or supply shocks.  We show that, contrary to the rational expectations equilibrium, ambiguity can result in widely different macroeconomic dynamics depending on which model prevails in equilibrium.  We then study how a central bank can use ambiguity to influence the distribution of subjective beliefs to its advantage and achieve its stabilization objectives.

The short-run Phillips Curves ... are curves

• • Even in its non-linear form, the standard price and wage New Keynesian Phillips Curves (NKPC) are quasi-linear. To address this shortcoming, we develop a New Keynesian (NK) model with endogenous price and wage setting frequencies. The Phillips curves become much steeper while price and wage inflation get higher. We estimate and simulate the full non-linear model on Eurozone data (1999-2023Q4). The model captures well the convexity and asymmetries in the wage and price Phillips Curves. Thanks to this, the effects of shocks are time, sign and state dependent on the business cycle. Two major implications of this model are that the inflation-output sacrifice ratio and wage-price pass-trough are time varying.  Finally, the model does not attribute most of the inflation dynamics to exogenous supply shocks.

Unemployment Risk and Discretionary Fiscal Spending

• • This paper studies the effects of discretionary fiscal policy responses to adverse aggregate shocks. For this, I build a tractable model where households face idiosyncratic unemployment risk in a Search-and-Matching (SaM) labor market with explicit intensive and extensive employment margins. Focusing on the spending side of fiscal stimuli, I investigate transitory increases in Unemployment Insurance (UI) benefits and public purchases. I show that the effects of transitory increases in fiscal spending largely depend on the state of the labor market and the type of adverse shock hitting the economy. At the aggregate level, the most welfare-improving fiscal stimuli appear to be rather small and over a long period. At the idiosyncratic level, welfare improvements are very unequally distributed.  Front-loaded increases in fiscal spending may run into supply constraints and have important undesirable consequences. Fiscal stimuli through UI transfers are never Pareto efficient whereas fiscal stimuli through public purchases can be.  

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Precautionary Saving and Un-Anchored Expectations

• • This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables.  This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations.

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