We build a two-country DSGE model of a monetary union to compare systematically the economic impact of a fiscal stimulus according to different features: domestic or European, public investment or public consumption, unfunded (thanks to grants) or debt-funded, on the core or periphery, and in normal or abnormal (post-ZLB) times. We highlight the importance of spillover wealth effects. Grants play a more important role when it comes to funding public consumption rather than investment, in contrast with the actual use of collective EU funds. A side result permits to assess the opportunity cost of accepting loans.

This paper explores the role of the cost channel in a behavioral New Keynesian model where households and firms have different degrees of cognitive discounting. Our findings are summarized as follows. First, we demonstrate how the degree of cognitive discounting significantly affects the determinacy condition through the cost channel model. Second, a high degree of cognitive discounting attenuates the response of inflation to a monetary tightening shock, and the cost channel amplifies this effect. Third, the degree of cognitive discounting significantly impacts the effect of the cost channel on the design of optimal monetary policy.

This paper studies the role of central bank communication for the monetary policy transmission mechanism using text analysis techniques. In doing so, we derive sentiment measures from European Central Bank (ECB)’s press conferences indicating a dovish or hawkish tone referring to interest rates, inflation, and unemployment. We provide strong evidence for predictability of our sentiments on interbank interest rates, even after controlling for actual policy rate changes. We also find that our sentiment indicators offer predictive power for professionals’ expectations, the disagreement among them, and their uncertainty regarding future inflation as well as future interest rates. Policy communication shocks identified through sign restrictions based on our sentiment measure also have significant effects on real outcomes. Overall, our findings highlight the importance of the tone of central bank communication for the transmission mechanism of monetary policy, but also indicate the necessity of refinements of the communication policies implemented by the ECB to better anchor inflation expectations at the target level and to reduce uncertainty regarding the future path of monetary policy.

We assess how an economy’s wealth distribution shapes its labor market dynamics. We do so in a quantitative job-ladder model featuring directed search, incomplete markets, aggregate shocks, and endogenous on-the-job human capital accumulation. Poorer workers apply for lower-wage jobs when unemployed and under-accumulate human capital when employed to self-insure against unemployment risk. In response to an aggregate downturn, poorer workers reduce their human capital accumulation, all else equal, while richer workers increase it. The wealth distribution therefore matters for the response of aggregate human capital. In the calibrated model, we show that a negative aggregate productivity shock leads to a persistent decline in aggregate human capital, and a more dispersed wealth distribution would amplify this decline.

In this paper, I propose a new method called the auxiliary state method (ASM) for solving highly nonlinear dynamic stochastic general equilibrium (DSGE) models with state variables that exhibit a non-elliptical ergodic distribution. The ASM method effectively avoids most improbable states that, while never visited, can create issues for numerical methods. I then demonstrate the ASM method by applying it to a model with highly asymmetric nominal rigidities, which are necessary to match the skewness of the U.S. inflation distribution. The ASM method can handle the high level of asymmetry, whereas the standard projection method cannot. Additionally, the ASM method is significantly faster than the standard projection method.

Incorporating environmental aspects in monetary and macroprudential policies poses a series of questions in terms of central banks’ effectiveness, independence, neutrality, and legitimacy. Most analyses of this matter rely on a purely economic approach, underestimating the trade-offs it entails and thus being biased in favor of central banks’ interventions. We develop a political-economy setting based on a Walsh contract, which can be interpreted as a memorandum that the government and central bank can implement. Through it, the former legitimizes, or pushes for, the intervention of the latter under the aegis of an elected authority. This setting eliminates the bias, unveiling the trade-offs that could result: accounting for and tackling climate risks could lead central banks to miss their policy targets, not necessarily making “brown” firms greener, and result in welfare distortions. Yet, thanks to this memorandum, the possibility of a green transition favored by the central bank is made possible. We conclude that central banks should keep a cautious stance when deciding to enter the climate arena, and that different evaluations of these risks can be interpreted as a reason why central banks around the world have adopted different degrees of climate interventionism.

The cross-sectional distribution of government debt is often approximated by a lognormal distribution. This note empirically demonstrates that government debt is more accurately characterized by the double Pareto-lognormal (dPLN) distribution, which features a lognormal body with two Pareto tails. The dPLN assuredly surpasses alternative parametric distributions and passes goodness-of-fit tests. With its analytical tractability, flexibility, and parsimony, coupled with a theoretical foundation, the dPLN may be appealing for different computational and empirical applications.

Technical progress is considered a key element in the fight against climate change. It may take the form of technological breakthroughs, that is, shocks that induce significant leaps in the stock of knowledge. We use an endogenous growth framework with directed technical change to analyze the climate impact of such shocks. Two production subsectors coexist: one subsector is fossil-based, using a non-renewable resource, and yields carbon emissions; the other subsector uses a clean, renewable resource. At a given date, the economy benefits from an exogenous technology shock. We fully characterize the general equilibrium and analyze how the shock modifies the economy’s trajectory. The overall effect on carbon emissions basically depends on the substitutability between the production subsectors, the initial state of the economy, and the nature and size of the shock. We notably show that green technology shocks induce higher short-term carbon emissions when the two subsectors are gross complements, but also in numerous cases when they are gross substitutes.

This paper adds to the literature on global inflation synchronization by distinguishing the traded and non-traded content of the consumption basket. Using a novel database of monthly CPI series of 40 countries from 2000, a dynamic factor model with stochastic volatility decomposes inflation into global, income-group, and idiosyncratic components. While synchronization has historically been prominent in tradable goods inflation, findings also reveal an increasing synchronization in non-tradable inflation. Second, I use a time-varying parameter vector autoregressive model to investigate the potential spillover effect. The results provide evidence of spillover from tradable to non-tradable inflation, while the reverse is mainly muted over the sample. Finally, results from local projections indicate that a tightening of US monetary policy causes a significant decline in global headline inflation, which is primarily driven by the heightened sensitivity of tradable goods.