Gaetano Gaballo

Private Uncertainty and Multiplicity

This paper provides the conditions under which small enough private uncertainty on an aggregate endogenous state of the economy can invalidate uniqueness of the equilibrium. The main result is presented in a fully microfounded macroeconomic model where agents learn from arising prices. The findings apply to a broad class of static signal extraction problems where both fundamental correlation and pay-off externalities jointly contribute to a multiplicity of equilibria. The cases where only one of these two determinants is sufficient for a multiplicity are also isolated and discussed.

Sequential Coordination, Higher-Order Belief Dynamics and E-Stability Principle

This paper explores convergence in higher-order beliefs - otherwise called eductive stability - when coordination is sequential, that is, when each agent of a given type fixes his own actions after observing the ones of earlier types in a given order. The presence of sequential types enhances expectational coordination in case of strategic substitutability, but not in case of strategic complementarity. In particular eductive stability can be obtained for any degree of substitutability, provided the number of sequential types is large enough. Therefore, sequential coordination opens up to the possibility that eductive convergence occurs at the same conditions of adaptive convergence, in accordance to the E-stability principle.

Communication of Monetary Policy in Unconventional Times

Monetary policy communication is particularly important during unconventional times because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank’s toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state‐contingent or when it provides guidance about a long horizon than when it is open‐ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme. JEL Classification: E43, E52, E58

Learning from prices: Amplification and business fluctuations

We provide a new theory of expectationsdriven business cycles in which consumers’ learning from prices dramatically alters the effects of aggregate shocks. Learning from prices causes changes in aggregate productivity to shift aggregate beliefs, generating positive price-quantity comovement. The feedback of beliefs into prices can be so strong that even arbitrarily small productivity shocks lead to substantial fluctuations. Augmented with a public signal, the model can generate a rich mix of supply- and demand-driven fluctuations even though productivity is the only source of aggregate randomness. Our results imply that many standard identification assumptions used to disentangle supply and demand shocks may not be valid in environments in which agents learn from prices. JEL Classification: D82, D83, E3

Bailouts, Moral Hazard and Bankss Home Bias for Sovereign Debt

This paper shows that an increase in banks’ holdings of domestic sovereign debt decreases the ability of domestic sovereigns to successfully enact bailouts. When sovereigns finance bailouts with newly issued debt and the price of sovereign debt is sensitive to unanticipated debt issues, then bailouts dilute the value of banks’ sovereign debt holdings rendering bailouts less effective. We explore this feedback mechanism in a model of financial intermediation in which banks are subject to managerial moral hazard and ex ante optimality requires lenders to commit to ex post inefficient bank liquidations. A benevolent sovereign may desire to enact bailouts to prevent such liquidations thereby neutralizing lenders’ commitment. In this context, home bias for sovereign debt may arise as a mechanism to deter bailouts and restore lenders’ commitment.