Working Papers

Sovereign Uncertainty R&R International Economic Review

This paper investigates the impact and the transmission of uncertainty regarding 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, which I refer to as sovereign uncertainty, and demonstrate that the estimated measure exhibits distinct fluctuations from macro-financial and economic policy uncertainty indices. Next, I analyze the behavior of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors using state-of-the-art identification strategies, within the context of a Bayesian vector autoregression framework. I show that a shock to sovereign uncertainty 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 a short-lived response 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. I find that a sovereign uncertainty shock in the model is able to capture the empirical slowdowns in economic aggregates if there is lack of reaction by the monetary authority in the aftermath of the 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.

Reconciling Empirics and Theory: The Behavioral Hybrid New Keynesian Model (joint with Atahan Afsar, José E. Gallegos, and Richard Jaimes)

Structural estimates of the standard New Keynesian model are at odds with microeconomic estimates. To reconcile these findings, we develop and estimate a behavioral New Keynesian model augmented with backward-looking households and firms. We find (i) strong evidence for bounded rationality, with a cognitive discount factor estimate of 0.4 at quarterly frequency; and (ii) that the behavioral setting with backward-looking agents helps us in harmonizing the New Keynesian theory with empirical studies. We suggest that both cognitive discounting and anchoring are essential, first, to match empirical estimates for certain parameters of interest, and second, to obtain the hump-shaped and initially muted impulse-response functions that we observe in the data.

The Macroeconomic Effects of Aerospace Shocks (joint with Luisa Corrado and Stefano Grassi)

As major future space explorations are firmly rooted in the US government agenda, research into the macroeconomic impact of a space mission is still scarce. This paper tries to fill the existing gap by building a narrative of the aerospace structural shocks to assess their macroeconomic effects. The main finding is that almost all the publicly funded space missions significantly and persistently raise real GDP, while this is not the case in the private narrative. We conclude that the latest events, while important from the perspective of private investors, do not reflect yet the milestone achievements carried out under government-driven space activity.


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

Assessing the Effects of Fiscal Policy News under Imperfect Information, with Luisa Corrado, 2022, Oxford Economic Papers, 1-14.

Work in Progress

Climate Change in the EAGLE model (joint with Pablo García-Sánchez, Pascal Jacquinot, Crt Lenarcic, Kostas Mavromatis and Niki Papadopoulou)

Macroeconomic Dynamics beyond FIRE (joint with José E. Gallegos and Richard Jaimes)

Aerospace Growth Spillovers: a Macroeconomic Perspective (joint with Luisa Corrado, Stefano Grassi and Aldo Paolillo)

Uncertain Narratives in the United Kingdom (joint with Andrés Azqueta-Gavaldón)