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Published
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Evolving Monetary/Fiscal Policy Mix in the United States (American Economic
Review, Papers & Proceedings,
forthcoming) APPENDIX |
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The Great Moderation of the Term Structure of U.K.
Interest Rates (with
Haroon Mumtaz and Paolo Surico, Journal of Monetary Economics, 2009, 56, pp. 856-71) |
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Working
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Regime
switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics (Revise and resubmit (second round), Review of Economic Studies, New Draft: April 2012) Abstract: The evolution of the U.S. economy over the last 55
years is examined through the lens of a micro-founded model that allows for
changes in the behavior of the Federal Reserve and in the volatility of
structural shocks. Agents are aware of the possibility of regime changes and
their beliefs matter for the law of motion underlying the macroeconomy.
Monetary policy is identified by repeated fluctuations between a Hawk- and a Dove- regime, with the latter prevailing in the `70s and during
the recent crisis. To explore the role of agents' beliefs I introduce a new
class of counterfactual simulations: beliefs counterfactuals. If in the `70s
agents had anticipated the appointment of an extremely conservative Chairman
inflation would have been lower and the inflation-output trade-off more
favorable. The large drop in inflation and output at the end of 2008 would
have been mitigated if agents had expected the Federal Reserve to be
exceptionally active in the near future. aa |
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Monetary/Fiscal Policy Mix and Agents' Beliefs
(with Cosmin Ilut) Abstract: We estimate a model for the US economy that
allows for a switch from a non-Ricardian to a Ricardian regime. Under the Ricardian
regime the central bank has full control of inflation, while under the non-Ricardian regime inflation is allowed to move to
stabilize debt. We find that the change in regimes occurred in the early '80s
and we highlight the following results. First, if the Ricardian
regime had been in place since 1955 or if agents had anticipated the switch,
the Great Inflation would not have occurred and debt would have been higher.
This is because the rise in trend inflation and the decline in debt of the
'70s were caused by a series of fiscal shocks that are inflationary only
under the non-Ricardian regime. Second, the
reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and
the fall in output of the early '80s are explained by the regime switch
itself. If the regime change had not occurred, inflation would have been high
for another ten years. Third, the regime switch accounts for the change in
the persistence and volatility of inflation. |
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aa |
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Rare
Events, Agents’ Expectations, and the Cross-Section of Asset Returns Abstract: This paper shows that rare events help
in explaining the cross section of asset returns because of their importance
in shaping agents' expectations. I reconsider the "bad beta, good
beta" ICAPM proposed by Campbell and Vuolteenaho and I point out that
the explanatory power of the model relies on including the stock market crash
that opened the Great Depression. When using a Markov-switching VAR, a '30s
regime is identified. This regime receives a large weight when forming
expectations consistent with the ICAPM, suggesting that the way agents think
about financial markets is shaped by what happens during extreme
circumstances. From a technical point of view, the paper extends the present
value decomposition of Campbell and Shiller to allow for Markov-switching
dynamics in the law of motion of the state variables. This approach could
shed new light on the sensitivity of the present value decomposition
methodology to the sample choice. |
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A Structural Approach to the Globalization Hypothesis for National Inflation Rates (with Andrea Civelli) Abstract: This paper studies the
relation between globalization and national inflation rates, contributing to
the recent debate about the effects of the increasing integration of the
world economy on national inflation processes which sees the thesis of Borio
and Filardo (07) opposed to that of Ihrig et al.
(07). We construct a new dataset, comparable to the one used in Ihrig et al., for a large sample of eighteen countries
and we estimate a time varying coefficients VAR for each of them. From the
reduced form estimates of the VAR, we find evidence supporting the view
against the Globalization Hypothesis. However, the results we obtain from the
structural version of the VAR show that globalization has had a significant
role in determining the dynamics of inflation for many countries since the
70's. These deeper relations could not emerge from the simple Phillips Curve
regressions. The Globalization Hypothesis fails also because the modest
increase in openness of the last three decades did not determine any
particular time evolution of the structural relations. Finally, a comparison
across countries relates the importance of the role of globalization
positively to the degree of openness of a country and to the degree of
idiosyncrasy of its business cycle. aa |
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Work in progress |
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Inflationary
Sentiments and Monetary Policy Communication (with Leonardo Melosi) Dormant
shocks and Fiscal Virtue (with Leonardo Melosi) Modeling
the Evolution of Public Expectations and Uncertainty (with Leonardo Melosi) Business
Cycles and Asset Prices: The Role of Volatility Shocks under Ambiguity
Aversion (with Cosmin Ilut
and Martin Schneider) Methods
for Markov-Switching Models |
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Discussions |
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Discussion of "Rare Disasters and Risk Sharing with
Heterogeneous Beliefs" by Chen, Joslin, and
Tran |
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Discussion of "Public’s Inflation Expectations and
Monetary Policy" by Leonardo Melosi |
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