Browsing by Author "Melosi, L"

Now showing 1 - 4 of 4

Open Access
Constrained Discretion and Central Bank Transparency
(Economic Research Initiatives at Duke (ERID), 2015-02-01) Bianchi, F; Melosi, L
We 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.
Open Access
Dormant shocks and fiscal virtue
(NBER Macroeconomics Annual, 2013-01-01) Bianchi, F; Melosi, L
We 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.
Open Access
Escaping the Great Recession
(Economic Research Initiatives at Duke (ERID), 2015-01-01) Bianchi, F; Melosi, L
High 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.
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.