1. Testing the effectiveness of unconventional monetary policy in Japan and the United States (with Daisuke Ikeda, Sophocles Mavroeidis, Francesco Zanetti)
American Economic Journal: Macroeconomics, 16(2), April 2024, pp.250-286

Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop a theoretical model that underpins our empirical test of this `irrelevance hypothesis,' based on the simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of monetary policy. We test the hypothesis for Japan and the United States using a structural vector autoregressive model with the ELB. We firmly reject the hypothesis but find that UMP has had strong delayed effects.

Working Paper:
1. Capital Flows and Exchange Rates: A Quantitative Assessment of the Dilemma Hypothesis (with Ambrogio Cesa-Bianchi and Andrea Ferrero)

In response to an unanticipated monetary policy tightening in the US, credit spreads of a typical small open economy increase, while real GDP and exports fall despite a depreciation of the local currency. Thus, the financial channel of the transmission of monetary policy shocks across countries dominates over the traditional expenditure-switching effect. The dominant role of the reserve currency in trade and global financial transactions can account for the evidence in an otherwise standard two-country open economy model with nominal and real rigidities. Yet, even in the presence of a global financial cycle, the exchange rate regime matters. In particular, a peg substantially increases macroeconomic volatility. The introduction of an additional policy instrument to manage capital flows dampens economic fluctuations. A tax on domestic credit achieves nearly equivalent results. Both these instruments can insulate the effects of foreign monetary policy shocks on real economic activity in a fixed exchange rate regime, but not on inflation.

2. The Global Financial Cycle and International Monetary Policy Cooperation

This paper evaluates gains from international monetary policy cooperation between the financial centre and periphery countries in a two-country open economy model consistent with global financial cycles. Compared to the non-cooperative Nash equilibrium, the optimal cooperative equilibrium robustly fails to benefit both countries simultaneously. The financial periphery is more likely to gain from cooperation if it raises less foreign currency debt or is relatively small. These results also hold when considering the transitional gains and losses of moving from non-cooperation to cooperation. The uneven distribution of gains from cooperation persists when both countries adopt implementable policy rules with and without cooperation. Nevertheless, both countries gain when transitioning from the Nash to the cooperative implementable rules. Regardless of the financial centre's policy, rules responding to the exchange rate dominate over purely inward-looking rules for the financial periphery.

3. What Hinders Structural Reforms

This paper studies the effect of political costs on implementing structural reforms in a macroeconomic political economy model with heterogeneous agents. I consider product market deregulation as a reform measure. In the model, deregulation creates potential winners and losers, and the potential losers endogenously decide to participate in political actions to impose political costs for the government. This political cost forces the government to implement an inefficiently high regulation level. A higher proportion of liquidity-constrained workers and a higher use of fixed-term labour contracts raise market regulation levels. In addition, high initial regulation levels are associated with a larger decrease in regulation levels in subsequent periods, consistent with the empirical literature. Compensation schemes, labour market reform, and strong government leadership in negotiation also help deregulation. Finally, I use the model to discuss why product markets are more deregulated in some European countries than in others.