Research

Job Market Paper

• Income Inequality and the Rise of Risky Capital
  

  This paper shows that the rise in labour income inequality since the 1980s can jointly explain four prominent macro-finance trends: the rise in the wealth-to-income ratio and the share of risky assets in household portfolios, the decline in the risk-free interest rate, and the stability of the return to capital. I develop an incomplete markets model with endogenous portfolio choice that captures two salient dimensions of cross-sectional household savings heterogeneity: wealth-to-income ratios and risky asset shares are increasing in labor income. I show that higher income inequality raises asset demand, in particular for risky assets, and reallocates capital towards more productive firms, raising aggregate productivity. Whereas both the risk-free and the risky return decrease in response to higher income inequality, the weighted average return remains stable due to portfolio reallocation towards risky capital. The model predictions are validated by cross-country evidence showing that higher income inequality is associated with a larger share of risky assets and lower risk premia.

  Presented at: LUISS University Internal Seminar, Paris School of Economics Macro Workshop

Working papers

• Marginal Propensities to Consume with Mental Accounting [April 24]
  SSRN
  

  The empirical literature studying marginal propensities to consume (MPCs) has identified a set of puzzles that are difficult to reconcile with traditional theories of consumption behaviour. This paper proposes a model of dissaving-averse households, a behavioural feature consistent with mental accounting, that addresses several of these puzzles jointly. The model generates high MPCs out of income gains, low MPCs out of income news, low MPCs out of wealth and asymmetric MPCs, i.e. stronger consumption responses to income losses than to income gains, for highliquidity households. In support of this prediction, I provide empirical evidence for the existence of pervasive MPC asymmetries. I show through the lens of a quantitative life-cycle model with mental accounting preferences that asymmetric MPCs dampen the effectiveness of redistributive fiscal policy.

  Presented at: NYU Student Macro Lunch 2022, 4th Behavioral Macroeconomics Workshop 2022, MMF 2022, CEPR European Conference on Household Finance 2022, 15th VPDE PhD Workshop 2022, NOeG Winter Workshop 2022, XXVI Workshop on Dynamic Macroeconomics in Vigo 2023, EEA-ESEM 2023, 2nd PhD and Post-Docs Workshop in Naples 2023

• The Macroeconomic Implications of Coholding, with Michael Boutros [July 24]
  Bank of Canada Staff WP
  

  In the U.S., over 25% of households are coholders who simultaneously borrow on credit cards and hold cash. This generates rich marginal distributions of gross positions that underpin the distribution of net wealth often used to calibrate macroeconomic models. We show that, beyond constructing net wealth, gross positions of liquid assets and debt are important determinants of how households consume, save, and repay debt in response to income shocks. We build a model that generates aggregate distributions and household behavior in line with the data, and use it to study the implications of coholding for fiscal and monetary policy.

  Presented at (* if by coauthor): Bank of Canada*, 5th Biennial Consumer Finance and Macroeconomics Conference 2023*, EEA-ESEM 2023, Australian National University*, 2023 OzMac Workshop*, University of Sydney*, Reserve Bank of Australia*, Toronto Metropolitan University*, E1 Workshop in Quantitative Macroeconomics 2024, Oslo Macro Conference 2024, 2nd Arne Ryde Workshop 2024*, Lisbon Macro Workshop 2024*, CEPR European Conference on Household Finance 2024*

• Domestic Inequality and Global Imbalances, with Jan Mazza [August 24]
  

  We study how the within-country distribution of income affects the current account. We document that higher income inequality is associated with higher current account balances, especially in advanced economies. This relation is driven by inequality in the permanent rather than the transitory component of income, and domestic savings rather than investment. We rationalize the empirical findings through a two-country heterogeneous agent model with non-homothetic preferences. The model generates increasing demand for savings across the distribution of permanent income, which, under international capital mobility, results in capital flows from unequal to equal countries. We use the model to analyze the effects of redistribution, financial liberalisation and cross-border financial integration.

  Presented at (* if by coauthor): 12th PhD Student Conference on International Macroeconomics 2023*, European Central Bank IPA Economic Meeting, Bank for International Settlements Research Seminar, 2023 Annual Meeting of the Central Bank Research Association - CEBRA*, 23rd RIEF Doctoral Meeting 2024, 27th Theories and Methods in Macro - T2M 2024*, PSE-CEPR Policy Forum 2024*, UCL Stone Center PhD Conference on Income and Wealth Inequality 2024*, EEA-ESEM 2024

• Monetary policy in the news: communication pass-through and inflation expectations, with Fiorella De Fiore, Alexis Maurin and Damiano Sandri [December 24]
  BIS WP, CEPR DP, VoxEU
  

  We analyse the media’s role in channelling information about the Fed’s monetary policy stance to the public. Using LLMs, we find a tight correspondence between FOMC communication and media coverage, although with significant variation over time. The communication pass-through weakened during the ZLB period and improved with the introduction of press conferences, which now exert strong influence on the media. Media coverage affects households’ inflation expectations, particularly when inflation is high and volatile, while we do not detect a direct impact of FOMC communication. This underscores the media’s crucial function in channelling central banks’ communication to the public.

Work in progress

• Decomposing Cross-Country Trends in Income Inequality, with Jan Mazza
• Equity Duration and Monetary Policy Transmission, with Johannes Graeb

Publications

• The Reliability of Equilibrium Exchange Rate Models: A Forecasting Perspective,
  with Michele Ca’Zorzi, Adam Cap and Michal Rubaszek
  International Journal of Central Banking (2022)
  ECB WP, Replication files, Slides for ISF21
  Coverage: Econbrowser, Macrohive
  

  In this paper we evaluate the predictive power of the three most popular equilibrium exchange rate concepts: Purchasing Power Parity (PPP), Behavioral Equilibrium Exchange Rate (BEER) and the Macroeconomic Balance (MB) approach. We show that there is a clear trade-off between storytelling and forecast accuracy. The PPP model offers little economic insight, but has good predictive power. The BEER framework, which links exchange rates to fundamentals, does not deliver forecasts of better quality than PPP. The MB approach has the richest economic interpretation, but performs poorly in forecasting terms. Sensitivity analysis confirms that changing the composition of fundamentals in the BEER model or modifying key underlying assumptions in the MB model does not generally enhance their predictive power.

Policy work

• Services Trade Liberalisation and Global Imbalances: a Critical Review of the Empirical Evidence,
  with Georgios Georgiadis
  ECB Economic Bulletin Box, Vol. 5, 2019