Research

Soft-Landing and 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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Data-driven Narratives and Monetary Policy

• This paper develops a framework for analyzing how economic agents form and use simplified causal narratives to understand and forecast macroeconomic dynamics, with specific application to monetary policy. We introduce data-driven narratives that satisfy internal consistency through cross-equation restrictions while potentially remaining misspecified. Applying this approach to a Fisherian model with average inflation targeting (AIT), we decompose belief distortions into extrinsic bias, intrinsic bias, and model-selection bias. We demonstrate that policy transparency fundamentally influences equilibrium determination: transparent AIT tends toward unique equilibria, while intentionally ambiguous AIT can generate multiple equilibria with different dominant narratives. The effectiveness of AIT critically depends on the persistence structure of underlying shocks and which narratives prevail. Our empirical analysis of U.S. data (1960-2019) reveals that demandfocused narratives have historically dominated. This helps explain why the Federal Reserve’s 2020 adoption of AIT may not generate the anticipated “make-up” dynamics essential to the policy’s success.

Monetary policy in the Euro Area: When the Phillips curves ... are curves

• • We investigate monetary policy where the wages and prices Phillips curves exhibit true curvature, moving beyond the quasi-linear structure of the standard nonlinear New Keynesian Phillips curves (NKPC). To address this limitation, we propose a New Keynesian (NK) model featuring endogenous adjustment frequencies for price and wage setting. Using euro area data spanning 1999Q1 to 2023Q4, we estimate and simulate the nonlinear model.  We then study the recent inflation surge and the implication of state-dependent prices and wages for monetary policy in the estimated non-linear model. Unlike conventional models, our framework does not rely mostly on exogenous supply shocks to explain inflation dynamics. Instead, the effects of shocks on inflation dynamics vary by time, magnitude, and state of the business cycle. The inflation-output stabilization trade-off faced by monetary policy varies with business cycle conditions. For example, monetary policy demonstrates greater efficacy in controlling inflation, and supply shocks have larger effects during periods of elevated inflation.

Consumer Price Stickiness in the Euro Area During an Inflation Surge 

• • Using CPI micro data for nine euro area countries, we document new evidence on consumer price stickiness in the euro area during the inflation surge between 2021 and 2023. The frequency of price changes increased by about 4 percentage points during the inflation surge in 2022. This increase is mainly driven by a larger share of price increases, while the average size of price increases or decreases varies little when inflation is higher. These findings align with the predictions of a state-dependent model. We provide further evidence supporting the existence of state dependence in consumer price adjustments by estimating hazard rates and conducting an inflation decomposition into extensive and intensive margins.

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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