Browsing by Author "Bianchi, F"
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Item Open Access Constrained Discretion and Central Bank Transparency(Economic Research Initiatives at Duke (ERID), 2015-02-01) Bianchi, F; Melosi, LWe develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents' uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that active inflation stabilization will be temporarily abandoned. However, this announcement reduces policy uncertainty and anchors inflationary beliefs at the end of the policy. For the U.S. enhancing transparency is found to increase welfare.Item Open Access Dormant shocks and fiscal virtue(NBER Macroeconomics Annual, 2013-01-01) Bianchi, F; Melosi, LWe develop a theoretical framework to account for the observed instability of the link between inflation and fiscal imbalances across time and countries. Current policymakers' behavior influences agents' beliefs about the way debt will be stabilized. The standard policy mix consists of a virtuous fiscal authority that moves taxes in response to debt and a central bank that has full control over inflation. When policymakers deviate from this virtuous regime, agents conduct Bayesian learning to infer the likely duration of the deviation. As agents observe more and more deviations, they become increasingly pessimistic about a prompt return to the virtuous regime and inflation starts drifting in response to a fiscal imbalance. Shocks that were dormant under the virtuous regime now start manifesting themselves. These changes are initially imperceptible, can unfold over decades, and accelerate as agents' beliefs deteriorate. Dormant shocks explain the run- up of US inflation and uncertainty in the 1970s. The currently low long- term interest rates and inflation expectations might hide the true risk of inflation faced by the US economy. © 2014 by the National Bureau of Economic Research. All rights reserved.Item Open Access Escaping the Great Recession(Economic Research Initiatives at Duke (ERID), 2015-01-01) Bianchi, F; Melosi, LHigh uncertainty is an inherent implication of the zero lower bound, while deflation is not because of inflationary pressure due to uncertainty about how debt will be stabilized. We show that policy uncertainty empirically accounts for the absence of deflation in the US economy. Announcing fiscal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning fiscal discipline, at the cost of increasing macroeconomic instability. The policy trade-off can be resolved by committing to inflating away only the portion of debt accumulated during the recession.Item Open Access Globalization and Inflation: Structural Evidence from a Time Varying VAR Approach(Economic Research Initiatives at Duke (ERID), 2013-07-01) Bianchi, F; Civelli, AUnder the Globalization Hypothesis for inflation, as globalization increases, global economic slack should progressively replace the domestic gap in driving inflation. In order to assess the empirical support for this theoretical prediction, we use impulse response functions of inflation to domestic and foreign output gap shocks from a TV-VAR model estimated for eighteen countries. The main results of the analysis are twofold: First, the structural results show that global slack affects the dynamics of inflation in many countries, yet these effects do not get stronger over time. Second, a panel analysis that exploits the cross-section characteristics of the response functions shows that globalization, measured in terms of openness and business cycles integration, is positively related to the effects of global slack on inflation. The degree of openness of a country and its economic integration into the global economy are complementary rather than overlaid forces.Item Open Access Growth, Slowdowns, and Recoveries(Economic Research Initiatives at Duke (ERID), 2014-11-01) Bianchi, F; Kung, HWe construct and estimate a model that features endogenous growth and technology diffusion. The spillover effects from research and development provide a link between business cycle fluctuations and long-term growth. Therefore, productivity growth is related to the state of the economy. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency variation in growth rates. Transitory inflationary shocks lead to persistent declines in economic growth. During the Great Recession, technology diffusion dropped sharply, while long-term growth was not significantly affected. The opposite occurred during the 2001 recession. The growth mechanism induces positive comovement between consumption and investment.Item Open Access Modeling the evolution of expectations and uncertainty in general equilibrium(International Economic Review, 2016-05-01) Bianchi, F; Melosi, L© 2016 by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.We develop methods to solve general equilibrium models in which forward-looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational and conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. We use a prototypical Real Business Cycle model to illustrate the methods.Item Open Access Monetary/Fiscal Policy Mix and Agents’ Beliefs(Economic Research Initiatives at Duke (ERID) Working Paper, 2014-05-01) Bianchi, F; Ilut, CWe reinterpret post World War II US economic history using an estimated microfounded model that allows for changes in the monetary/fiscal policy mix. We find that the fiscal authority was the leading authority in the ‘60s and the ‘70s. The appointment of Volcker marked a change in the conduct of monetary policy, but inflation dropped only when fiscal policy accommodated this change two years later. In fact, a disinflationary attempt of the monetary authority leads to more inflation if not supported by the fiscal authority. If the monetary authority had always been the leading authority or if agents had been confident about the switch, the Great Inflation would not have occurred and debt would have been higher. This is because the rise in trend inflation and the decline in debt of the ‘70s were caused by a series of fiscal shocks that are inflationary only when monetary policy accommodates fiscal policy. The reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and the fall in output of the early ‘80s are explained by the switch in the policy mix itself. If such a switch had not occurred, inflation would have been high for another fifteen years. Regime changes account for the stickiness of inflation expectations during the ‘60s and the ‘70s and for the break in the persistence and volatility of inflation.Item Open Access Regime switches, agents'beliefs, and post-worldwar II U.S. macroeconomic dynamics(Review of Economic Studies, 2013-04-01) Bianchi, FThe evolution of the U.S. economy over the past 55 years is examined through the lens of a microfounded model that allows for changes in the behaviour of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs matter for the law of motion underlying the macroeconomy. Monetary policy is identified by repeated fluctuations between a Hawk and a Dove regime, with the latter prevailing in the 1970s and during the recent crisis. To explore the role of agents' beliefs I introduce a new class of counterfactual simulations: beliefs counterfactuals. If, in the 1970s, agents had anticipated the appointment of an extremely conservative Chairman, inflation would have been lower and the inflation-output trade-off more favourable. The large drop in inflation and outputat the end of 2008 would have been mitigated if agents had expected the Federal Reserve to be exceptionally active in the near future. © The Author 2012. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.