Working Papers

  • Inflation and Real Activity over the Business Cycle, with Francesco Bianchi and Dongho Song. New draft: March 2023.

    We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR model to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are related to cyclical movements in real activity and unemployment, in line with what is implied by the New Keynesian framework. We then discuss the reasons for which our results relying on a Trend-Cycle VAR differ from the findings of previous studies based on VAR analysis. We explain empirically and theoretically how to reconcile these differences.

  • U.S Monetary Policy and Indeterminacy, R&R to Journal of Applied Econometrics. New draft: May 2023.

    [Note: This paper was previously circulated as “Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle.”]
    In this paper, I investigate the stance of U.S. monetary policy in the postwar period. To this end, I show that two features are key: a rich structural model and a parameterization of the indeterminate solution that ensures a sufficient exploration of the indeterminacy region during the estimation procedure. As a result, I estimate a medium-scale model on U.S. macroeconomic data using the novel method proposed by Bianchi and Nicolò (2021) to allow for indeterminacy. The evidence of a passive monetary policy in the pre-1979 period is pervasive and robust to the use of alternative model specifications and data. By contrast, the evidence of an active stance after 1979 is overturned if the period of the Volcker disinflation is excluded or if the model is estimated including a time-varying inflation target and data on inflation expectations.


  • 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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