Working papers

Assessing the aggregate and distributional implications of large-scale bond purchases in the euro area

Abstract: This paper studies the effects of the ECB’s large-scale bond purchases on euro area economic activity and income inequality, in a New Keynesian model with limited asset market participation. I estimate the model using Bayesian methods and euro area data, considering the occasionally binding constraint on the policy rate and the public sector purchase programme (PSPP) implemented by the ECB in 2015. The results suggest that the PSPP has effectively lifted both output and inflation. In terms of income inequality, the impact was modest overall but exhibited a non-linear profile. In the early years of the program, income inequality widened, reflecting rising asset prices. Subsequently, however, this trend reversed, with gradual and sustained growth in labor income becoming the predominant factor, leading to a decline in income inequality.

Optimal normalization policy under behavioral expectations

joint with Kostas Mavromatis, Reject and Re-submit at the Journal of Monetary Economics

DNB Working Paper version

Abstract: We examine optimal normalization strategies for a central bank confronted with persistent inflationary shocks and a potential de-anchoring of expectations. Our analysis characterizes optimal monetary policy, when the central bank uses both the short-term interest rate and the balance sheet, in a framework in which agents' expectations can deviate from the rational expectations benchmark. Optimal policy is developed using a sufficient statistics approach, highlighting the dynamic causal effects of changes in each policy instrument on the central bank's targets. Three key insights emerge: first, the interest rate is identified as the key instrument for managing inflationary pressures, outperforming balance sheet adjustments. Second, having anchored expectations about the path of quantitative tightening (QT) is crucial to mitigate economic downturns and controlling inflation, within the framework of an optimal balance sheet strategy set under a predefined interest rate rule. Lastly, when both the interest rate and QT are set optimally, expectations are found to significantly influence the optimal interest rate trajectory, whereas their impact on the optimal QT path is comparatively minimal.

Work in progress

Behavioral learning equilibria in a bond market with asset purchases

joint with Cars Hommes

Abstract: This paper studies the effects of central banks' asset purchases on long-term government bond yields, in a model featuring investors who adopt a simple yet optimal AR(1) forecasting rule based on past data. By examining the convergence dynamics of agents towards a specific Behavioral Learning Equilibrium (BLE), we uncover the factors that shape the efficacy of these policies: financial market volatility and short-term interest rates. In periods characterised by low financial stress, agents' learning process leads to stable convergence, with forecasts exhibiting a near-unit root first-order autocorrelation coefficient. As a consequence, quantitative easing (QE) demonstrates significant and persistent effects on bond yields. However, in times of heightened financial volatility, multiple equilibria emerge, leading QE to have effects that vary from high to low persistence.