This paper investigates the impact and the transmission of uncertainty about the future path of government finances on economic activity. I first employ a data-rich approach to extract a novel proxy that captures uncertainty surrounding public finances, to which I refer as sovereign uncertainty, and demonstrate that the estimated measure exhibits autonomous fluctuations from macro-financial and economic policy uncertainties. Next, I rely on Bayesian vector autoregression methods, together with state-of-the-art identification strategies, to analyze the behavior of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors. In addition, I show that a shock to sovereign uncertainty notably differs from a macro-financial uncertainty shock — while the former dampens the economy in the medium-run and points to deflationary dynamics, the latter displays short-lived responses in real activity and generates inflationary pressures. Finally, I study the role of sovereign uncertainty in a New Keynesian dynamic stochastic general equilibrium model, augmented with recursive preferences and financial intermediaries, where entire empirical slowdowns in economic aggregates are captured if there is lack of reaction by the monetary authority in the aftermath of a sovereign uncertainty shock. The model also emphasizes the importance of financial frictions in transmitting the effects of sovereign uncertainty shocks and highlights the minor role played by nominal rigidities.
"Adverse Noisy News in Times of Uncertainty" (joint 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.
"Assessing the Effects of Fiscal Policy News under Imperfect Information" (joint with Luisa Corrado)
We study the transmission of fiscal policy under imperfect information where government spending is composed by permanent and transitory components. Agents learn about the previous processes by only observing overall public spending and a noisy signal. Under this setting and employing maximum likelihood techniques, we construct a novel measure of fiscal policy news and show that the estimated variable agrees with the historical narrative evidence for the U.S. economy. We then document the effects of this proxy on economic activity by using local projection methods. The results indicate that real activity indicators exhibit delayed positive effect. We also check that the reduction in public debt after two years can be justified through the operation of automatic stabilizers in which tax revenues increase due to the delayed output expansion generated by the fiscal news shock.
"Ambiguous Economic News and Heterogeneity: What Explains Asymmetric Consumption Responses?" (joint with Luisa Corrado, Robert Waldmann and Donghoon Yoo)
We study information and consumption and whether consumers respond symmetrically to good and bad news. We define a news variable and show that it has explanatory power. We then test the hypothesis that consumers react more to bad news than to good news using the PSID to analyze the response of households' consumption to news about aggregate future income. We find that our news variable helps one predict households' consumption change and that consumption responses are larger following negative (bad) news than positive (good) news. We suggest that observed asymmetric consumption responses could be due to agents’ aversion to ambiguous information.
Work in Progress
"Uncertain Narratives in the United Kingdom" (joint with Andrés Azqueta-Gavaldón)
"Reconciling Empirics and Theory: The Behavioural Hybrid New Keynesian Model" (joint with Atahan Afsar, Jose E. Gallegos and Richard Jaimes)
"The Macroeconomic Effects of Aerospace Shocks" (joint with Luisa Corrado and Stefano Grassi)
"Sovereign Spread Volatility and Banking Sector" (joint with Vivek Sharma)