Incorporating environmental aspects in monetary and macroprudential policies poses a series of questions in terms of central banks’ effectiveness, independence, neutrality, and legitimacy. Most analyses of this matter rely on a purely economic approach, underestimating the trade-offs it entails and thus being biased in favor of central banks’ interventions. We develop a political-economy setting based on a Walsh contract, which can be interpreted as a memorandum that the government and central bank can implement. Through it, the former legitimizes, or pushes for, the intervention of the latter under the aegis of an elected authority. This setting eliminates the bias, unveiling the trade-offs that could result: accounting for and tackling climate risks could lead central banks to miss their policy targets, not necessarily making “brown” firms greener, and result in welfare distortions. Yet, thanks to this memorandum, the possibility of a green transition favored by the central bank is made possible. We conclude that central banks should keep a cautious stance when deciding to enter the climate arena, and that different evaluations of these risks can be interpreted as a reason why central banks around the world have adopted different degrees of climate interventionism.

This paper studies the role of central bank communication for the monetary policy transmission mechanism using text analysis techniques. In doing so, we derive sentiment measures from European Central Bank (ECB)’s press conferences indicating a dovish or hawkish tone referring to interest rates, inflation, and unemployment. We provide strong evidence for predictability of our sentiments on interbank interest rates, even after controlling for actual policy rate changes. We also find that our sentiment indicators offer predictive power for professionals’ expectations, the disagreement among them, and their uncertainty regarding future inflation as well as future interest rates. Policy communication shocks identified through sign restrictions based on our sentiment measure also have significant effects on real outcomes. Overall, our findings highlight the importance of the tone of central bank communication for the transmission mechanism of monetary policy, but also indicate the necessity of refinements of the communication policies implemented by the ECB to better anchor inflation expectations at the target level and to reduce uncertainty regarding the future path of monetary policy.

In this paper, I propose a new method called the auxiliary state method (ASM) for solving highly nonlinear dynamic stochastic general equilibrium (DSGE) models with state variables that exhibit a non-elliptical ergodic distribution. The ASM method effectively avoids most improbable states that, while never visited, can create issues for numerical methods. I then demonstrate the ASM method by applying it to a model with highly asymmetric nominal rigidities, which are necessary to match the skewness of the U.S. inflation distribution. The ASM method can handle the high level of asymmetry, whereas the standard projection method cannot. Additionally, the ASM method is significantly faster than the standard projection method.

This paper explores the role of the cost channel in a behavioral New Keynesian model where households and firms have different degrees of cognitive discounting. Our findings are summarized as follows. First, we demonstrate how the degree of cognitive discounting significantly affects the determinacy condition through the cost channel model. Second, a high degree of cognitive discounting attenuates the response of inflation to a monetary tightening shock, and the cost channel amplifies this effect. Third, the degree of cognitive discounting significantly impacts the effect of the cost channel on the design of optimal monetary policy.

This article examines the interplay between fiscal policy and investments in climate change mitigation and adaptation. Adaptation is funded by public revenues from taxation and public bonds, whereas households can invest in mitigation and receive subsidies. We show that adaptation and mitigation are substitutes or complements, depending on the level of economic development and fiscal policy decisions. If the capital stock is initially low, adaptation and mitigation are complements (resp. substitutes) if the mitigation subsidy is low (resp. high). When the government is in debt, we show that increasing public spending to finance adaptation and/or mitigation could be beneficial if the capital stock is high enough but could be detrimental for countries with low capital stock. Thus, we add a new argument to the debate on the optimal mix between adaptation and mitigation, namely fiscal policy and the funding schemes of these investments. Finally, we propose extensions that consider a level of adaptation proportional to pollution flow, debt financing of public investment, and public mitigation investment alongside private adaptation investment.

We build a two-country DSGE model of a monetary union to compare systematically the economic impact of a fiscal stimulus according to different features: domestic or European, public investment or public consumption, unfunded (thanks to grants) or debt-funded, on the core or periphery, and in normal or abnormal (post-ZLB) times. We highlight the importance of spillover wealth effects. Grants play a more important role when it comes to funding public consumption rather than investment, in contrast with the actual use of collective EU funds. A side result permits to assess the opportunity cost of accepting loans.

I investigate the welfare maximizing steady-state inflation rate in a heterogeneous-agent New Keynesian model with Downward Nominal Wage Rigidity (DNWR). After matching the annual wage change distribution in the U.S., I demonstrate that DNWR has a significant impact on the economy, particularly when the inflation target is set low. The optimal inflation rate is estimated to be as high as 8.8%, and increasing the inflation target to the optimal level yields a welfare gain of nearly 3.50%. While the results exhibit sensitivity to parameterization, a broad range of calibrations indicates that the optimal inflation rate is consistently above 3%.

This paper investigates both conditional and unconditional convergence in labor productivity within the manufacturing industries of the Eurozone over the period 1963 – 2018. We employ two innovative models: constant and varying-coefficient hierarchical panel data convergence regression models, each equipped with two sets of latent factor structures—one comprising global factors and the other industry-specific factors. These models offer distinct advantages, allowing for both global and industry-specific cross-sectional dependencies and permitting parameter heterogeneity across individual industries. Our findings reveal both conditional and unconditional convergence across the manufacturing industry as a whole, as well as among the majority of the 23 sub-manufacturing industries at the ISIC two-digit level. Moreover, we observe significant variation in convergence dynamics among these sub-manufacturing industries. Robustness checks, performed across different subperiods, confirm the reliability of our results. Furthermore, a comparison of our model’s outcomes with those of two alternative models provides additional support for our conclusions.

We study long-run inflation in a competitive-search model with heterogeneous agents. Under competitive search, individuals’ matching-probability (extensive) margins trade off against quantity (intensive) margins. With money and unfettered market participation, these trade-offs depend on inflation and individuals’ heterogeneous money holdings. We find that welfare falls as inflation increases. However, money-holdings inequality is not monotonic in inflation. As inflation rises, liquid-wealth inequality first falls. For sufficiently high inflation, the overall extensive-margin effect dominates the intensive margin, and liquid-wealth inequality rises. The model also poses a new computational challenge to which we propose a novel solution method.

Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to demand and supply shocks under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with lower or higher weight on the unemployment gap. Across all rules, responding to unemployment leads to lower losses of employment. Responding to unemployment reduces cross-country differences within the monetary union and consumption inequality between rich and poor households within each country.

This paper examines how the interaction between natural selection, household education choices and R&D activities influences macroeconomic growth. We develop an innovation-driven growth model that integrates household heterogeneity in educational ability with endogenous fertility and the activation of innovation. Our findings reveal that households with lower educational abilities accumulate less human capital but have more offspring and initially gain a temporary evolutionary advantage. This demographic shift enhances the likelihood of innovation taking off; however, the resulting reduction in the share of high-ability households ultimately constrains R&D efforts and slows long-term economic growth. We empirically validate our theoretical model using cross-country data and instrumental variables, demonstrating that disparities in educational ability negatively impact education, innovation and growth over the long run. This study provides new insights into the complex dynamics between natural selection, endogenous fertility and economic development, with significant implications for both policy and theory.

This study develops a two-country New Keynesian model incorporating deep habits in consumption to analyze macroeconomic dynamics under the optimal coordinated monetary policy. The central bank adjusts interest rates more aggressively in response to structural shocks in an open economy than in a closed economy. Deep habits strengthen the central bank’s incentive to adjust terms of trade through interest rates due to habit formation and counter-cyclical markup behavior, creating price inelasticity in demand. Deep habits also lead to deviations from the law of one price, reflected in goods-specific real exchange rates, which the degree of home bias influences. Finally, this study compares international policy coordination to noncoordination to analyze welfare gains, showing that they depend on key structural factors like price rigidity, deep habits, and home bias. Policy coordination stabilizes domestic output and inflation by internalizing externalities in terms of trade and consumption.

Using US quarterly data (1967–2023), including inflation’s post-pandemic surge and decline alongside monetary policies characterized by quantitative easing before refocusing on the 2% target, we utilize traditional and novel econometric tools to assess the stability of key macroeconomic variables’ responses to monetary shocks. Our findings confirm the relevance of a broad Divisia aggregate in understanding monetary policy transmission and highlight its empirical importance in explaining output and price dynamics across decades. Time-varying impulse response functions (IRFs) reveal consistent and puzzle-free price responses to Divisia-based monetary shocks throughout the sample, aligning with theory. Time-varying IRFs indicate that pandemic-related outliers in GDP (2020Q2) do not disrupt results. In contrast, Fed Funds rate or shadow policy interest rate shocks often yield puzzling outcomes across earlier and extended periods.

The measured markups in the U.S. have been increasing since the 1980s. This paper quantitatively evaluates the impact of surging mergers and acquisitions (M&As) on the aggregate markup. We propose a dynamic general equilibrium model featuring heterogeneous firms, endogenous markups, and an M&A market to explore the aggregate implications of M&As under different antitrust policy regimes. Firms are heterogeneous in productivity, while more productive firms are larger in size and charge a higher markup, and the M&A market is characterized by a search and matching process. Successful purchases of other firms improve the productivity of the acquirer but also raise its markup. We calibrate the impact of M&As on markups at the firm level to the data counterpart. Our quantitative results show that surging M&As account for about 60% of the 9.75 percentage points increase in aggregate markup in the U.S. from the 1980s to the 2010s. The quantified model also generates changes in the markup distribution comparable to the data.

Previous research has established various debt thresholds beyond which economic performance deteriorates, but few studies examine these thresholds in the context of ongoing fiscal consolidation efforts. This study investigates the interplay between government debt and fiscal consolidation in Organisation for Economic Co-operation and Development countries from 2000 to 2022. The findings reveal that fiscal consolidation, encompassing reductions in government expenditure and tax increases, results in a notable reduction of 1.366% in the primary fiscal balance and a minor 0.024% decrease in GDP per capita. This study significantly contributes to the literature by clarifying the impact of fiscal consolidation relative to specific debt thresholds and its implications for economic performance. A critical government debt threshold of 31.4% of GDP is identified, beyond which debt negatively affects GDP per capita in the presence of fiscal consolidation. Similarly, a debt threshold of 86.7% is found to have a detrimental effect on the primary fiscal balance in the presence of fiscal consolidation. The study shows for disaggregating government expenditure and taxation, that military spending reduces GDP per capita, while investments in health and education have positive effects. Notably, government consumption expenditure harms GDP per capita. On the fiscal balance side, military and education spending improve fiscal health, whereas government consumption and indirect taxes contribute negatively. The findings underline the importance of targeted fiscal policies, suggesting that prudent government spending, especially in health as well as education, and careful management of debt levels are crucial for maintaining economic stability during fiscal consolidation.

This paper investigates the permanent effect on total factor productivity (TFP) of temporary shocks. We estimate a structural vector autoregression to test the predictions of endogenous growth models over the business cycle. According to theory, the stock of technological knowledge promotes its flow as researchers “stand on the shoulders of giants.” Therefore, if R&D investment is pro-cyclical—as data show and theory predicts—a recession leads to a temporary deviation of the R&D level from its trend, thus reducing new knowledge creation. The lost technological advancements cause the economy to follow a parallel but permanently lower growth path. Our findings align with the primary theoretical prediction. Quantitatively, the US economy forgoes approximately 1.3% in TFP following an increase in cyclical unemployment that peaks at 1 percentage point above the mean. The historical variance decomposition shows a strong positive effect during the boom of the late 1960s and strong negative effects around the Volcker disinflation period and the Great Recession. Finally, we estimate the effects on R&D of a TFP shock to differentiate between different explanations on how the R&D pro-cyclicality arises. Our results align with models where financial frictions or nominal rigidities drive it.

This paper revisits the relationship between tax evasion and tax rates in a heterogeneous-agent, incomplete-markets model. Extending the foundational works of Allingham and Sandmo (1972) and Yitzhaki (1974), we explore how financially constrained households use tax evasion to mitigate the adverse effects of market imperfections. We show that deterrence policies, such as audit probabilities and penalties, exacerbate the effects of borrowing constraints. Importantly, increasing income tax rates can sometimes alleviate these negative impacts when individuals evade taxes. We identify three mechanisms shaping underreporting: the direct effect, the threshold effect, and the income effect. These help explain when and why the Yitzhaki puzzle arises. Numerical results reveal a non-monotonic relationship between tax rates and underreporting, underscoring the relative strength of these effects and offering fresh insights into the Yitzhaki puzzle.

The present paper studies how to encourage longer careers by reducing labor income taxes for older workers. The analysis relies on numerical experiments within a general equilibrium overlapping generations (OLG) model that is calibrated to an average economy of the organisation for economic co-operation and development (OECD). I find that the policy can delay retirement and increase tax revenue and the capital stock if treatment occurs close to, and before, the preferred retirement age. A non-trivial share of the increased post-treatment labor supply can be explained by the substitution of hours worked from the pre-treatment career to the post-treatment career. Lowering the treatment age only leads to small changes in the aggregate labor supply, but is increasingly costly for the government in terms of forgone revenue. Tax shifting toward higher consumption taxes always increases welfare, while tax shifting toward higher capital or labor income taxes paid by younger workers only increases welfare if treatment occurs sufficiently late in the career.

This paper aims at reexamining external sustainability in a dynamic framework for nine European Monetary Union (EMU) countries during the period 1970–2021. We extend the approach of Bohn (1998) to a time-varying external reaction function. The main advantage of our empirical strategy is that it captures the dynamics of the external reaction function, by accounting for the main sources of heterogeneity among EMU countries and by including common factors like financial globalization and global risk aversion. To estimate the model, we employ a fully fledged state-space framework, which extends the simple model generally used in this literature to a panel-data time-varying parameter framework, combining fixed (common and country-specific) and varying components. Our results show an evident interplay between real and financial variables, the latter progressively increasing their importance. Although heterogeneous, the adjustment to external imbalances in most EU countries is jointly driven by the level reached in the stock of net foreign assets together with the degree of risk aversion and financial openness.