Research
Research
Publications
Unwinding Quantitative Easing: State Dependency and Household Heterogeneity (with Cristiano Cantore)
European Economic Review, Volume 170, November 2024, 104865
[Published article] [Online Appendix] [Banque de France WP (2024)] [Bank of England SWP (2023)] [Codes]
This paper studies the asymmetry in the macroeconomic effects of central bank asset market operations induced by state dependency and the associated role of household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We highlight the significance of an occasionally binding zero lower bound in explaining a weaker aggregate impact of asset sales relative to asset purchases. In this context, when close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing mitigates the economic costs of monetary policy normalization. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not enhance the aggregate effects of asset market operations.
Working Papers
On the Distributional Effects of Conventional Monetary Policy and Forward Guidance (with Giacomo Mangiante)
[Draft]
This paper compares the distributional effects of conventional monetary policy and forward guidance. Adopting a structural VAR model, we first estimate the impact of both policies on the macroeconomy and on consumption inequality in the United States. We find similar responses of aggregate real and financial variables. In contrast, consumption inequality is countercyclical after a monetary policy shock, but responds procyclically to forward guidance, due to the diverse reactions of households at the top and bottom of the consumption distribution. We build a New Keynesian model with household heterogeneity to rationalize these differences. Motivated by the empirical evidence, we highlight the government's response via a fiscal transfer scheme that reacts to changes in the debt burden and to cyclical variations. A fiscal adjustment differing in timing and magnitude leads to a relatively larger decline in consumption among financially constrained agents under conventional monetary policy, but a smaller decline under forward guidance. Our findings emphasize the importance of considering the negative second-order effects that different central bank tools might entail and the crucial role of fiscal adjustments in mitigating these effects.
Sticky Information, Heterogeneity, and Aggregate Demand
[Draft]
Heterogeneity and information rigidities impact the effectiveness of monetary policy transmission to aggregate demand. I document considerable differences in the frequency of information updating across U.S. households. Using a tractable two-agent New Keynesian model with heterogeneous households and sticky information, I then show that the response of aggregate consumption to a monetary policy shock is shaped by an asymmetric interaction of amplification and dampening. First, an attenuated consumption response might arise even if the income of constrained households responds disproportionately to the shock and income inequality is countercyclical, decreasing the probability of achieving amplification. Second, household heterogeneity is proportionately more influential in combination with sticky information, while the latter dampens aggregate consumption more in the absence of heterogeneity. The model is solved analytically by a simple, but novel approach which overcomes difficulties in handling the infinite state space caused by the information friction.
Work in Progress
Optimal Timing of Forward Guidance: The Role of Heterogeneity and Expectation Formation
Discussions
Is the financial market driving income distribution? – An analysis of the linkage between income and wealth in Europe, by Ilja Kristian Kavonius and Veli-Matti Törmälehto
IARIW-Bank of Italy Conference on "Central Banks, Financial Markets, and Inequality", Naples, March 2023
Monetary Policy and Distribution: An agent-based perspective, by Hannah Engljähringer
YSI Pre-Conference @ IARIW-Bank of Italy Conference, Naples, March 2023
Heterogeneous information, subjective model beliefs, and the time-varying transmission of shocks, by Alistair Macaulay
RGS Doctoral Conference in Economics (virtual), February 2022