Francesco Giuli

Robust Policies in a Sticky Information Economy

This paper analyzes the behavior of a central bank under strong (Knightian) uncertainty when the short run trade-off between output and inflation is represented by the Sticky Information Phillips Curve proposed by Mankiw and Reis (2002). By solving the robust control problem analytically we show why model uncertainty does not affect the optimal monetary policy response to demand and productivity shocks, while it causes a stronger reaction of the monetary policy instrument to a cost push (i.e., mark up) shock. Differently from what occurs in sticky price models, the anti-attenuation effect can result in a degree of price level stabilization which is greater or lower than that experienced in the rational expectation model, depending on the central bank degree of conservatism. These results drammatically affect the rationale for delegating monetary policy to a central banker more conservative than society.

Contractionary Effects of Supply Shocks: Evidence and Theoretical Interpretation

The debate on the response of hours worked after productivity improvements is still an open issue in the theoretical and empirical literature. In this work we show that, once conditional correlations are taken into account, both hours and investment decline temporarily following a positive technology shock. We fiÂ…rst provide evidence about this apparent puzzle employing weakly identiÂ…ed SVECs. We then set-up and estimate a sticky price/wage DSGE model in which the presence of strategic complementarities in pricesetting lowers the slope of the New Keynesian Phillips curve, and show that the posterior impulse responses are consistent with the SVEC-based evidence.

Robust Control in a Sticky Information Economy

This paper analyzes the behavior of a central bank under strong (“Knightian”) uncertainty when the short run trade-off between output and infl‡ation is represented by the Sticky Information Phillips Curve recently proposed by Mankiw and Reis (2002). By solving the robust control problem analytically, this paper elucidates the economic mechanisms at play in a sticky information economy and shows how and why the robust monetary policy in this economy differs from the optimal one identi…ed by Ball, Mankiw and Reis (2005).

Fiscal and Monetary Interaction Under Monetary Policy Uncertainty

Despite the recent increasing number of studies on monetary policy uncertainty, its role on the strategic interactions between fiscal and monetary policies has not been fully explored. Our paper aims to fill this gap by tackling this issue by evaluating the consequences produced by multiplicative uncertainty in such a context.

Firm-specific capital, productivity shocks and investment dynamics

The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We first show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is firm-specific and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary effects on investment. Even if this result emerges in both the firm-specific and rental capital specifications, only with the former the estimated average price duration is in line with microeconometric evidence. In the firm-specific capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which firms change their prices.

Protecting Savings: Do We Need a Supervision Authority?

We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole’s (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bonds’ risk; a unique benevolent public authority aims at maximising savers’ welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on firms’ true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. We establish the necessary condition that allows the optimal sanctions to produce the first best equilibrium.

Contractionary Technology Shocks

This paper adds to the large body of literature on the effects of technology shocks empirically and theoretically. Using a structural vector error correction model, we first provide evidence that not only hours but also investment decline temporarily following a technology improvement. This result is robust to important data and identification issues addressed in the literature. We then show that the negative response of inputs is consistent with an estimated monetary model in which the presence of strategic complementarity in price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal costs, and monetary policy does not fully accommodate the shock.

Price-Setting, Monetary Policy and the Contractionary Effects of Productivity Improvements

This paper adds to the large literature on the e¤ects of technology shocks empirically and theoretically. Using a SVEC model, we rst show that not only hours but also investment decline temporarily following a technology improvement. This result is robust with respect to important data and identi cation issues addressed in the literature. We then show that the negative response of inputs is consistent with an estimated monetary DSGE model in which the presence of strategic complementarity in price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal costs, and monetary policy does not fully accommodate the shock.

The Effects of Monetary Policy Shocks in Credit and Labor Markets with Search and Matching Frictions

By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and bank sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of output and wages to a monetary shock, and that the transmission of monetary policy shocks to output and inflation is more relevant than suggested by the recent literature.

Tackling undeclared work. Suggestions from a business cycle model with search frictions

The paper evaluates the relative effect of deterrence, prevention, curative and commitment policy measures on the size of undeclared work in a real business cycle model with undeclared work, tax evasion and search frictions in the labour market. A numerical application of the model to the European economy shows that all these approaches reduce the undeclared share of output, but that deterrence and commitment policies also produce a negative effect on stationary employment. The curative approach produces the sharper fall in undeclared work while stimulating stationary output and employment.