Working Papers

Green Transition in the Euro Area: Domestic and Global Factors (with Pablo García-Sánchez, Pascal Jacquinot, Crt Lenarcic, Kostas Mavromatis and Niki Papadopoulou)

We analyze the economic impact of green transition in the Euro area by extending the Euro Area and Global Economy (EAGLE) model with green and brown energy sectors. Energy goods are consumed as final goods by households and as inputs by intermediate goods firms. A carbon tax manifests itself as a cost-push shock, being stagflationary, when fiscal interventions are not primary-balance neutral. Absent subsidies to green energy firms, green transition is associated only with household expenditure switching towards green energy goods. When subsidies to green energy firms are activated, firms in the intermediate good sector also raise their demand for green energy inputs, strengthening the demand channel in the market for green energy driving thus its price upwards. When carbon taxes are raised globally, the recession in the euro area deepens while the inflationary pressures amplify, triggered partly by a weakening of the euro. Taxes on brown capital investment are also contractionary but are instead deflationary. Subsidies to green energy capital investment can mitigate in this case the recession. Overall though, taxes on brown capital investment are not successful in strengthening the green transition as opposed to carbon taxes.

Unexpected Expectations (with José-Elias Gallegos and Jaime Martínez-Martín)

We investigate the impact of monetary policy on economic agents' beliefs, using data from various surveys. We document that contractionary monetary policy shocks generate positive output and inflation forecast revisions, despite anticipation of higher policy rates, while conventional full information rational expectations models predict negative forecast revisions. We rationalize these findings by introducing information frictions, arguing that agents obtain information on the economic outlook during central bank announcements. Cleaning for the information effect, pure monetary policy shocks generate 25% larger responses. Furthermore, we examine optimal forward guidance strategies at the zero lower bound, contrasting promises of low interest rates versus targets about aggregate demand.

The Pass-Through to Inflation of Gas Price Shocks (with Lucia López, Florens Odendahl and Susana Párraga)

This paper uses a Bayesian Structural Vector Autoregressive (BSVAR) framework to estimate the pass-through of unexpected gas price supply shocks on HICP inflation in the euro area and its four largest economies. In comparison to oil price shocks, gas price shocks have approximately one-third smaller pass-through to headline inflation. Country-specific results indicate gas price increases matter more for German, Spanish and Italian inflation than for French inflation, hinging on the reliance on energy commodities in consumption, production, and different electricity prices regulation. Consistent with gas becoming a prominent energy commodity in the euro area, including time-variation through a time-varying parameter BVAR demonstrates a substantially larger impact of gas price shocks on HICP inflation in recent years. The empirical estimates are then rationalized using a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model augmented with energy. In the model, the elasticity of substitution between gas and non-energy inputs plays a critical role in explaining the inflationary effects of gas shocks. A decomposition of the recent inflation dynamics into the model structural shocks reveals a larger contribution of gas shocks compared to oil shocks.

Adverse Noisy News in Times of Uncertainty (with Luisa Corrado and Donghoon Yoo)

We study the non-linear effects of noisy news about productivity in periods of low and high macroeconomic uncertainty. We first use a New Keynesian dynamic stochastic general equilibrium (NK-DSGE) model to extract aggregate noisy news from U.S. data. The measure illustrates that optimistic agents’ expectations are recovered after every crisis period with the exception of the Great Recession. Later, by employing threshold vector autoregression (TVAR) techniques, we show that adverse noisy news shocks lead to sizable and non-linear negative effects in macroeconomic aggregates under different uncertainty regimes, with the Federal Reserve responding firmly to noisy news during elevated uncertainty states. Over the course of time, we note potential benefits from falling uncertainty once the outcome of the noisy news shocks has been revealed. 


Sovereign Uncertainty, International Economic Review (Forthcoming) [Updated WP version]

A Behavioral Hybrid New Keynesian Model: Quantifying the Importance of Belief Formation Frictions (2024) with Atahan Afsar, José-Elias Gallegos and Richard Jaimes. Economic Modelling, 132.

The Macroeconomic Spillovers from Space Activity (2023) with Luisa Corrado, Stefano Grassi and Aldo Paolillo. Proceedings of the National Academy of Sciences (PNAS), 120.

Assessing the Effects of Fiscal Policy News under Imperfect Information (2023) with Luisa Corrado. Oxford Economic Papers, 75.

Ambiguous Economic News and Heterogeneity: What Explains Asymmetric Consumption Responses? (2022) with Luisa Corrado, Robert Waldmann and Donghoon Yoo. Journal of Macroeconomics, 72.