Emiliano Santoro

Determinacy, Stock Market Dynamics and Monetary Policy Inertia

This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy.

Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages

This paper deals with the implications of factor demand linkages for monetary policy design. We consider a dynamic general equilibrium model with two sectors that produce durable and non-durable goods, respectively. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input-output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of exogenous shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.

Consumer Attitudes and the Epidemiology of Inflation Expectations

This paper studies the formation of consumers’ infl‡ation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of infl‡ation expectations like gender, income or education also other characteristics like the household’s fi…nancial situation and its purchasing attitudes matter. Respondents with current or expected …financial difficulties, with pessimistic attitudes about major purchases, or who expect income to go down in the future have considerably higher forecast errors, are further away from professional forecasts and have a stronger updward bias in their expectations than other households. However, their bias shrinks by more than the one of the average household in response to increasing media reporting about in‡flation.

Monetary Policy with Sectoral Trade-offs

We formulate a two-sector New Keynesian economy that features sectoral heterogeneity along three main dimensions: price stickiness, consumption goods durability, and the inter-sectoral trade of input materials. The combination of these factors deeply affects inter-sectoral and intra-sectoral stabilization. In this context, we examine the welfare properties of simple rules that adjust the policy rate in response to the output gap and alternative measures of final goods price inflation. Aggregating durable and non-durable goods prices depending on the relative frequency of sectoral price-setting may induce a severe bias. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector of the economy. As a result, measures of aggregate inflation that weigh sectoral price dynamics based on the relative degree of price rigidity do not allow the central bank to keep track of the effective speeds of sectoral price adjustment.

Reference-Dependent Preferences and the Transmission of Monetary Policy

This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger effects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically different across different cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households. utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing effects on the responses of output and inflation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-o¤ between inflation and output stabilization that naturally arises in this context. Greater elasticity of inflation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of inflation under discretion, compared to what is otherwise prescribed during contractions.

Leverage and Deepening Business Cycle Skewness

Documentamos que la economia de Estados Unidos se ha caracterizado por una asimetria del ciclo economico cada vez mas negativa durante las ultimas tres decadas. Este hallazgo puede explicarse por el aumento del apalancamiento financiero de hogares y empresas. Para mostrar esto, disenamos y estimamos un modelo dinamico de equilibrio general con prestamos garantizados y restricciones de credito ocasionalmente vinculantes. Un mayor apalancamiento aumenta la probabilidad de que las restricciones financieras se relajen ante perturbaciones expansivas, mientras que las perturbaciones contractivas se amplifican al hacerse estas restricciones mas vinculantes. Como resultado, las expansiones se vuelven progresivamente mas suaves y prolongadas que las recesiones. Por tanto, es posible conciliar una mayor asimetria negativa en el ciclo economico junto con la Gran Moderacion en la volatilidad ciclica. Finalmente, de acuerdo con la evidencia empirica reciente, encontramos que las expansiones financieras llevan a contracciones mas profundas que expansiones no financieras de igual tamano.

Size, Age and the Growth of Firms: New Evidence from Quantile Regressions

The nexus between firm growth, size and age in U.S. manufacturing is examined through the lens of quantile regression models. A number of interesting features are unveiled that linear frameworks could not detect. Size pushes both low and high performing firms towards the median rate of growth, while age is never advantageous, and more so as firms grow faster.

Monetary Policy with Sectoral Linkages and Durable Goods

We study the normative implications of a New Keynesian model featuring intersectoral trade of intermediate goods between two sectors that produce durables and non-durables. The interplay between durability and sectoral production linkages fundamentally alters the intersectoral stabilization trade-off as it emerges in otherwise standard two-sector models. We compare the welfare properties of a timeless-perspective monetary policy with the performance of simple instrumental rules that adjust the policy rate in response to the output gap and alternative aggregate measures of final goods price inflation. Aggregating durable and non-durable inflation depending on the relative degrees of sectoral price stickiness may induce a severe bias. Input materials attenuate the response of sectoral inflations to movements in the real marginal costs, so that the effective slopes of the sectoral supply schedules are not properly accounted for by conventional measures of core inflation.