Working Papers

  • Monetary Policy, Expectations and Business Cycles in the U.S. Post-War Period, R&R to Journal of Applied Econometrics.

    This paper examines the interactions between monetary policy and the formation of expectations to explain U.S. business cycle fluctuations in the post-war period. I estimate a conventional medium-scale New-Keynesian model, in which I relax the assumption that the central bank pursued an ‘active’ monetary policy — i.e. that stabilizes inflation and output growth — over this entire period. I find that between 1955 and 1979 monetary policy was ‘passive’, and structural shocks de-anchored inflation expectations from the central bank’s long-run target. Fundamental productivity and cost shocks were the primary cause of volatility and propagated via persistent self-fulfilling inflationary expectations. By contrast, non-fundamental ‘sunspot’ shocks, caused by unexpected changes in inflation expectations, were insignificant sources of uncertainty.


  • A Generalized Approach to Indeterminacy in Linear Rational Expectations Models, with Francesco Bianchi, Quantitative Economics, July 2021, Vol. 12(3), pp. 843-868. Prepublication version. Codes: Lubik Schorfheide (2004) example.

    We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original state space with a set of auxiliary exogenous equations to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region are unknown. Thus, the researcher can estimate the model by using standard packages without restricting the estimates to the determinacy region. We combine our method with a novel hybrid Metropolis-Hastings algorithm to estimate the New-Keynesian model with rational bubbles by Galí (2021) over the period 1982:Q4-2007:Q3. We find that the data support the presence of two degrees of indeterminacy, implying that the central bank was not reacting strongly enough to the bubble component.

  • Some International Evidence for Keynesian Economics without the Phillips Curve, with Roger E. A. Farmer, The Manchester School, July 2019. Available as NBER WP 25743.

    Farmer and Nicolò (2018) show that the Farmer Monetary (FM)-Model outperforms the three-equation New-Keynesian (NK)-model in post -war U.S. data. In this paper, we compare the marginal data density of the FM-model with marginal data densities for determinate and indeterminate versions of the NK-model for three separate samples using U.S., U.K. and Canadian data. We estimate versions of both models that restrict the parameters of the private sector equations to be the same for all three countries. Our preferred specification is the constrained version of the FM-model which has a marginal data density that is more than 30 log points higher than the NK alternative. Our findings also demonstrate that cross-country macroeconomic differences are well explained by the different shocks that hit each economy and by differences in the ways in which national central banks reacted to those shocks.

  • Keynesian Economics Without the Phillips Curve, with Roger E. A. Farmer, Journal of Economic Dynamics and Control, April 2018, Vol. 89, pp. 137-150Prepublication version.

    We extend Farmer’s (2012b) Monetary (FM) Model in three ways. First, we derive an analog of the Taylor Principle and we show that it fails in U.S. data. Second, we use the fact that the model displays dynamic indeterminacy to explain the real effects of nominal shocks. Third, we use the fact that the model displays steady-state indeterminacy to explain the persistence of unemployment. We show that the FM model outperforms the New-Keynesian model and we argue that its superior performance arises from the fact that the reduced form of the FM model is a VECM as opposed to a VAR.

  • Solving and Estimating Indeterminate DSGE Models, with Roger E. A. Farmer and Vadim Khramov, Journal of Economic Dynamics and Control, May 2015, Vol. 54, pp. 17-36.

    We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We prove that our method is equivalent to the solution method proposed by Lubik and Schorfheide (2003, 2004), and using the New-Keynesian model described in Lubik and Schorfheide (2004), we demonstrate how to apply our theoretical results with a practical exercise.

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