We examine how a more hawkish policy stance – defined as an above-median long-run inflation semi-elasticity of the policy rate – affects economic growth in 37 inflation-targeting (IT) countries. To this end, we estimate time-varying, bias-corrected forward-looking Taylor rules for all IT countries for which the data permit such estimation. Our results point to sizable growth effects, exceeding 0.8% annually, for countries with a more hawkish policy stance. This suggests that the growth benefits reported in the previous literature on inflation targeting are primarily driven by a small subset of countries that react more forcefully to inflation.

After a period of stable prices in advanced economies, inflation surged in 2022, largely driven by substantial increases in international food and energy prices. Using electronic payments data to estimate a demand system, we derive expenditure and price elasticities and evaluate the welfare effects of these relative price changes for Portuguese consumers. Our results indicate an average welfare loss of approximately 10% of total expenditure, disproportionately affecting lower-spending consumers. Furthermore, we observe that lower-expenditure consumers generally have larger price elasticities than their higher-spending counterparts. These results reinforce the evidence of the unequal welfare costs of inflation on consumers.

Macroeconomic models often have multiple equilibria. Nonetheless, a popular view on inflation targeting posits that this policy helps to coordinate agents’ expectations and actions. This paper provides a rationalization for this notion. I consider an infinitely repeated game, built on the Barro-Gordon model, in which the central bank incurs a fixed penalty whenever the actual inflation rate differs from the announced target and study how changes in the penalty impact its equilibria. I conclude that, in consonance with the aforementioned view, an inflation-targeting policy lessens the problem of equilibrium multiplicity. However, by itself, it is unlikely to achieve uniqueness.

In expectations-driven liquidity traps (LTs), a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven LTs to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven LT lowers the optimal inflation target nontrivially. Our analysis provides a novel reason to be cautious about the argument that central banks should raise their inflation targets in light of a higher likelihood of hitting the ELB.

This paper quantitatively examines the effect of globalization on the natural rate of interest in developed economies, including Japan, the US, and the euro area. By incorporating into the model the variables that capture global economic and financial trends, such as demand and supply of safe assets and cross-border spillovers, with a smooth-transition framework, we account for the existence of nonlinear regime change of their coefficients, driven by globalization. Our findings indicate that along with the progress of globalization, (i) the impact of global factors rapidly increased around 2000 and (ii) the commonly observed decline in the natural rate of interest can be largely attributed to these global factors. These findings underscore the importance of incorporating global factors such as demand and supply of safe assets and global spillovers, with their increasing impact, alongside domestic factors such as productivity and demographics, when investigating developments in the natural rate of interest.

A “two-regime” view of there being a strong positive relationship between money growth and inflation in high-inflation episodes and little relationship occurring between them otherwise has been restated of late. Using the P-star model, and Divisia money aggregates, we demonstrate money having explanatory power across US inflation’s conditional distribution over a near-60-year sample period. We find the price gap—the difference between the observed and the equilibrium price level—to be significant and of the expected sign, both when outliers are down-weighted and for most of the quantile range. While the impact of the price gap tends to be strongest when inflation is high, there is a significant monetary impulse to prices across the inflation distribution. Monetary transmission to prices occurs more strongly through the money market than the goods market. As well as providing evidence against the two-regime view, the novel quantitative approach to P-star estimation demonstrates the model’s versatility in showing money’s broadly-based influence on inflation.

Private currencies can facilitate intertemporal exchange under limited commitment but exhibit excessive volatility when backed by productive assets subject to news shocks. I develop a model where banks issue deposits backed by firms’ output as collateral, with deposits circulating as currency. Adverse news about firm productivity—even when socially uninformative—induces binding debt constraints and deposit volatility, creating liquidity shortages that depress economic activity. With household heterogeneity, deposits are priced at a premium in liquidity-constrained economies. Interest-bearing central bank money provides an additional policy tool beyond traditional money growth. The interest rate influences asset prices through an investment channel: banks hold interest-bearing reserves as insurance against productivity shocks. This enables welfare-improving policies requiring positive inflation and nominal interest rates—departing from the Friedman rule. Calibrating the model to the US economy, I find that interest-bearing money generates a welfare gain of 2.54%, with the welfare cost of departing from the Friedman rule being roughly an order of magnitude smaller than the cost of operating with a suboptimal transfer. As an extension, I examine private information about consumer preferences, showing that illiquid bonds become essential for achieving efficiency. Cash-in-advance constraints on deposits can improve welfare by preventing destabilizing arbitrage, enabling coexistence of government and private currencies.

I use a combination of a structural dynamic factor model and quantile regressions to study how monetary policy shocks affect the predicted distributions of GDP growth and inflation in the US. Contractionary monetary policy shocks shift the expected distribution of GDP growth to the left and deepen its two modes. The expected distribution of inflation is spread out and retains significant probability mass for inflation increases.

This paper tests the Milton Friedman hypothesis that money growth variability affects the velocity of money. It compares the Federal Reserve’s simple-sum monetary aggregates, the original (non-credit-card-augmented) Divisia aggregates, and the credit-augmented Divisia and credit-augmented Divisia inside monetary aggregates using two classes of empirical models. Standard Granger causality tests and a bivariate structural GARCH-in-Mean VAR model examine how money growth variability affects the consumption and income velocity of money. Using monthly data for the post-2006 period, when all monetary indicators are available, the findings reject the Friedman hypothesis when money supply volatility is modeled explicitly using recent advances in macroeconometrics and financial econometrics. This result is robust to a longer sample extending back to 1967 with monthly and quarterly data, across alternative model specifications. From a policy standpoint, this enhances the predictability and reliability of monetary policy actions aimed at stabilizing the economy using monetary aggregates.

This paper examines how bargaining frictions generate privately inefficient job separations and amplify unemployment fluctuations. I propose a simple specification of bargaining friction by including bargaining wedges in the standard Nash bargaining model. Such bargaining wedges arise when, for example, wages are determined by alternating-offers bargaining, which is often used in the literature to generate real wage rigidity, or when there is asymmetric information about worker’s productivity. I show that due to the misalignment between actual surpluses and bargaining surpluses, inefficient separations could be generated, which would in turn induce inefficient unemployment. I highlight a distinct amplification mechanism that operates through the separation margin. The existence of inefficient unemployment due to bargaining friction could accentuate the fluctuation of unemployment. Quantitatively, I find that inefficient unemployment accounts for up to 30% of the total unemployment volatility in the calibrated model.

This study examines the relationship between sovereign spreads and bank shares in terms of risk transmission, using a sample of the largest Italian banks over the period 2003–2023. Our objective is to quantify and compare volatility spillovers and to investigate whether bank-specific characteristics help to explain them. We perform a dynamic connectedness analysis based on the Bayesian estimation of a vector autoregression with time-varying parameters. Our results suggest that, with the exception of the period of the euro area debt crisis, banks tend to transmit more spillovers than they absorb. Moreover, these spillovers are related to factors such as capital adequacy and the composition of banks’ portfolios.

This paper explores the dynamic effects of labor unions on economic growth and income inequality in a Schumpeterian growth model with heterogeneous households and endogenous market structure. Income inequality arises from an unequal distribution of wealth and heterogeneous labor productivity. In the short run, increasing union bargaining power reduces both growth and inequality when the union is wage-oriented. In the long run, stronger unions continue to lower inequality without affecting the steady-state growth rate. The model identifies the channels through which unions shape inequality: an income-share shift from asset income to labor income, wage compression, and changes in the wealth-wage correlation. Calibrating the model to U.S. data, we find that increasing union bargaining power significantly reduces long-run income inequality.

We study real and monetary growth models with households endowed with limited foresight and planning only for a finite number of periods, despite being infinitely lived (myopia). In the real model, there emerges a unique Balanced Growth Path ($BGP$) characterized by sub-optimal capital accumulation. However, by relaxing myopia, it converges to the $BGP$ of the economy with perfect foresight. We then prove the existence of equilibria where money, even in absence of financial frictions or liquidity constraints, is positively valued and non-neutral, in contrast to usual results in infinite horizon. Specifically, there arise two monetary $BGPs$, where money is non-neutral along the first one and neutral along the second one. Eventually, we perform a global stability analysis and identify the optimal monetary policy maximizing welfare.

Despite accelerating debt levels, the real yield on U.S. Treasuries remains low due to investors’ desire for their extreme safety and liquidity services. The convenience premium on Treasuries allows fiscal policy to pursue profligate budget plans without imposing inflationary threats on a low-interest-rate monetary policy. Using a change-point vector autoregression model, I estimate the time-varying properties of U.S. inflation and fiscal stance that characterize long-term debt cycles. An archetypal debt cycle consists of alternating phases of persistent deficits and surpluses in tandem with alternating patterns of inflation and fiscal stance. I present a simple analytical model based on the fiscal theory of the price level where households have a preference for holding government bonds. When the real interest rate falls below the economy’s growth rate, permanent fiscal deficits can be sustained under passive monetary and active fiscal policy. I estimate an extended dynamic stochastic general equilibrium model and find strong negative correlations between fiscal policy and bond preference shocks across all subsamples. This suggests that flight-to-safety episodes may have systematically dampened fiscal inflation over the past two decades.

This paper develops an endogenous growth model featuring income-dependent risk preferences to explain the emergence and evolution of buyout funds. We propose a novel preference structure where high-income agents derive utility from the thrill of entrepreneurial risk-taking, leading them to acquire business ideas from capital-constrained innovators. The model demonstrates that buyout funds emerge as equilibrium contracts when income inequality exceeds a critical threshold, with wealthy investors paying premiums to participate in ventures. Conversely, in more equal economies, buyout funds serve as transitional institutions. Initial inequality enables the acquisition of ideas, but subsequent growth allows the original idea holders to become independent entrepreneurs, leading to the fund’s eventual decline. Our framework provides microfoundations for understanding how income distribution shapes financial intermediation patterns and their growth consequences, offering new insights into the relationship between inequality, entrepreneurial spawning, and innovation-driven growth.

Using the Gordon growth model, this paper investigates monthly fluctuations in the US housing market. The investigation is based on a vector autoregressive model with fixed coefficients that can explain the broad movements in housing volatility at the zip code level. The corresponding variance decomposition analysis further shows that the housing premium is the main driver of housing market fluctuations. Motivated by previous studies and using impulse response functions, it is also investigated how different components of the housing market respond over time to a shock in the interest rate in zip codes with different levels of income or demographics. The corresponding results reveal that the rent growth channel of monetary policy is effectively blocked in zip codes with lower income, higher female or minority populations, or lower education, while remaining functional in less vulnerable areas. These findings lead to important policy suggestions for targeted interventions.

Companies with high emissions can offset their climate impact by participating in emission reduction projects through voluntary carbon markets (VCMs) in several countries. Firms that generate these offsets and provide them to polluting companies dedicate a portion of their activities to carbon sequestration in exchange for compensation. This emitter–absorber interaction has unclear environmental and economic implications, especially within the same jurisdiction of a compliance carbon market (CCM), such as the Emissions Trading System. The impact of stringent climate policies on competitiveness is debated, and their effects on VCMs remain unknown. This study presents an evolutionary model that explains how carbon leakage (CL), the preference to relocate industrial activities to jurisdictions without mandatory permit requirements, can influence VCMs diffusion in a jurisdiction already implementing CCM. We compared the structural changes in offset suppliers resulting from the substitutability of emission absorption and mainstream business models in two cases: (i) non-negative switching costs and (ii) zero switching costs. The results indicate that, while firms might be willing to participate in VCM, CL reduces the incentive to do so and, therefore, the demand for offsets. However, the welfare performance and competitive outcome of both sides of the VCM improve when offset practices are combined with agricultural activities, particularly when the government introduces barriers to firms’ exit or limits the availability of offsets.

Given growing concerns among policymakers about the inflationary consequences of climate policies, I examine how households in the Euro Area adjust their inflation expectations in response to carbon policy shocks. The main finding is that a shock increasing energy inflation by one percentage point leads households to raise their inflation expectations by up to 0.1 percentage points. This aggregate response masks important cross-country heterogeneity, where the expectations response in countries with a larger share of energy-intensive goods in household consumption and a stronger deterioration of consumer sentiment is more pronounced. The timing and magnitude of these responses closely mirror those following an oil supply news shock, suggesting a common household expectations response to energy price shocks regardless of their source. Decomposing the response reveals that households adjust their expectations primarily through the energy price pass-through channel rather than in direct response to the shock itself.

This paper first presents a dynamic model that features both real and monetary aspects of international trade and is capable of dealing with both full employment and secular unemployment. The model is then utilized to examine the effect of a tariff on the terms of trade, the trade pattern, real consumption, and employment of labor. It is shown that with full employment in both countries, a small tariff by the home country increases its real consumption at the expense of the foreign country by improving the terms of trade. These results however are reversed in the presence of unemployment in both countries. We also examine the asymmetric case and calibrate our model to evaluate numerically the effect of large tariff changes. The main finding is that the effects of tariffs on consumption are opposite in the absence and the presence of unemployment.

Misallocation of workers and their human capital across sectors has negative implications for productivity. The literature examining this type of labor misallocation has mostly assumed a Cobb–Douglas production function, which is at odds with important macroeconomic frameworks and empirical evidence. Our paper hence suggests a new twist to revisit the question: to what extent does human capital misallocation across sectors explain why some countries are so much richer than others? Our innovation consists of incorporating a more flexible and empirically plausible CES production structure with different labor skill types into the misallocation literature. The results from this analysis indicate that human capital misallocation can explain approximately 15% of output per worker variation across countries, which is about one fourth less than under the conventional Cobb–Douglas specification (21%). This suggests that labor market efficiency may be less of a problem for aggregate productivity differences than previously thought.