Expectations and Fluctuations: The Role of Monetary Policy
(This draft: 14 November 2013)
This paper reconsiders the effects of expectations on economic fluctuations. It does so within a competitive monetary economy which features producers and consumers with heterogeneous information about productivity. Agents' expectations about productivity are coordinated by a noisy public signal, which generates non-fundamental--``noise''--shocks. I show that, depending on how monetary policy is pursued, noise shocks can resemble either demand shocks, as conventionally thought, or supply shocks--increasing output and employment, yet lowering inflation. On the policy front, I show that inflation stabilization is suboptimal, whereas output-gap stabilization is optimal.
- EUI Working Paper MWP 2013/18
The Length of Monopolies and the Timing of Innovation
(This draft: 28 July 2016)
This article evaluates the effects of the length of monopoly profits from new ideas on the timing of innovation. As in Shleifer (1986, Journal of Political Economy), I let firms in different sectors receive cost-saving ideas exogenously and sequentially, from which they can make temporary monopoly profits. In the presence of aggregate, cross-sectoral, demand externalities, firms might opt to postpone the implementation of their ideas so that they innovate together with firms from other sectors---and, as a result, a self-fulfilling ''implementation'' boom becomes realized. I show that a prolongation of the innovating firms' monopoly horizon limits the appeal of this possibility, and, for not too radical ideas, the benefit of their early implementation exceeds the cost of their delayed diffusion, leading to a welfare improvement.
Deposit Flight and Capital Controls: A Tale from Greece (with Romanos Priftis)
This paper presents an analytical narration of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2015 and set Greece apart from other episodes of sovereign debt crises: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy environment along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption as well as reallocate it towards formal goods, as evidenced by the data. We further show that capital controls mitigate the deposit flight and reinforce the reallocation of consumption towards formal goods.
I show that monetary policies targeting expected inflation generate a continuum of equilibria for any chosen weight on inflation. This is true as long as consumer expectations about future productivity are the same across all time-horizons. Interestingly, what distinguishes equilibria is the role of consumer expectations which is entirely arbitrary. Therefore, expected inflation targeting can potentially lead consumer expectations to cause excessive volatility, whereas forward communication can help ameliorate this problem.
Noisy Fluctuations and Nominal Credit Constraints: The Role of Monetary Policy
(work in progress)