Francesco Furlanetto

Rule‐Of‐Thumb Consumers, Productivity, and Hours

In this paper we study the transmission mechanisms of productivity shocks in a model with rule-of-thumb consumers. In the literature, this financial friction has been studied only with reference to fiscal shocks. We show that the presence of rule-of-thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks. Rule-of-thumb agents, together with nominal and real rigidities, play an important role in reproducing the negative response of hours and the delayed responses of output and consumption after a productivity shock.

Fiscal shocks and real rigidities

In this paper we show that results on the effects of fiscal shocks in Galí, López-Salido and Vallés (2007) rely on a high degree of price stickiness and a large percentage of financially constrained agents. Real rigidities in the form of habit persistence, fixed firm-specific capital and Kimball demand curves interact in interesting ways with nominal and financial rigidities and allow us to reproduce the same consumption multiplier as Galí et al. (2007) under only two and a half quarters of price stickiness, instead of four, and only 30 per cent of constrained agents instead of 50 per cent. Therefore, real rigidities are useful in the study of fiscal shocks in addition to monetary and productivity shocks as has been shown in the previous literature, though rule-of-thumb consumption remains too crude a mechanism for accounting for the hump-shaped response of consumption found in the data.

Mismatch Shocks and Unemployment During the Great Recession

We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor-market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium-scale DSGE model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve.

New Perspectives on Depreciation Shocks as a Source of Business Cycle Fluctuations

In this paper we study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. We show that these shocks are a potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables.

Investment-Specific Technology Shocks and Consumption

Current business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that a positive investment-specific technology shock generally induces a negative consumption response. The objective of this paper is to investigate whether positive consumption responses to investment-specific technology shocks can be obtained in a modern business cycle model. We find that the answer to this question is yes. With a combination of nominal rigidities and non-separable preferences, the consumption response is positive for general parameterisations of the model.

Investment shocks and macroeconomic co-movement

Recent studies find that shocks to the marginal efficiency of investment are main drivers of business cycles. However, they struggle to explain why consumption co-moves with key real variables such as investment and output. In this paper, we show that, within a conventional business cycle model, rule-of-thumb consumption provides a straightforward explanation of macroeconomic co-movement after a shock to the marginal efficiency of investment.

Matching Efficiency and Business Cycle Fluctuations

A large decline in the efficiency of the US labor market in matching unemployed workers and vacant jobs has been documented during the Great Recession. We use a simple New Keynesian model with search and matching frictions in the labor market to study the macroeconomic implications of matching efficiency shocks. We show that the propagation of these disturbances and their importance for business cycle fluctuations depend crucially on the form of hiring costs and on the presence of nominal rigidities.

Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US, i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again, and ii) only episodically took real stock price growth into account.

Output Gap in Presence of Financial Frictions and Monetary Policy Trade-Offs

The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.

Immigration and the macroeconomy: some new empirical evidence

We propose a new VAR identification scheme that enables us to disentangle immigration shocks from other macroeconomic shocks. Identification is achieved by imposing sign restrictions on Norwegian data over the period 1990Q1 - 2014Q2. The availability of a quarterly series for net immigration is crucial to achieving identification. Notably, immigration is an endogenous variable in the model and can respond to the state of the economy. We find that domestic labour supply shocks and immigration shocks are well identified and are the dominant drivers of immigration dynamics. An exogenous immigration shock lowers unemployment (even among native workers), has a small positive effect on prices and on public finances, no impact on house prices and household credit, and a negative effect on productivity.