The paper estimates public consumption multipliers and whether they vary depending on the slack of the economy. To this aim, linear and smooth-transition panel local projections are applied to a data set composed of quarterly data on nine selected Euro area countries for the period 1999Q1−2018Q4. The results show that the linear multiplier is approximately 1.3 and so above unity. This is, however, an “average result” as clear evidence is found in favor of state dependency. Particularly, the findings indicate that the multiplier is approximately 2.0 in the slack regime, while it is below 0.5 in the good regime. These results are robust along several dimensions, such as alternative measures of slack and controlling for fiscal foresight. Some linear and state-dependent transmission channels are also investigated.

This paper augments the DMP model with large firms and intrafirm wage bargaining by an endogenous decision to become an entrepreneur that is based on heterogeneous entrepreneurial abilities. If workers’ wage bargaining power is not too large and the match efficiency is not too low, the decentralized market equilibrium features an inefficiently high number of entrepreneurs, because they appropriate large parts of the surplus from matches. A realistic calibration with empirically plausible parameters shows this case to be the relevant one. Consequently, introducing a tax on the profits of entrepreneurs restores the constrained first-best allocation by affecting occupational choices. It drives rather unproductive entrepreneurs out of the market since the marginal entrepreneur is affected and not the average one. Thus, the negative effects on job creation are small.

Economists have long been interested in the effect of business sentiment on economic activity. Using text analysis, I construct a new company-level indicator of sentiment based on the net balance of positive and negative words in Australian company disclosures. Company-level investment is very sensitive to changes in this corporate sentiment indicator, even controlling for fundamentals, such as Tobin’s Q, as well as controlling for measures of company-level uncertainty.

The high sensitivity of investment to sentiment could be due to several mechanisms. It could be because of animal spirits among managers or because of sentiment proxies for private information held by managers about company prospects. Overall, I find mixed evidence of the underlying causal mechanism. The effect of sentiment on investment is relatively persistent, which is consistent with managers having private information about company fundamentals. But the sensitivity of investment to sentiment is not any stronger at opaque companies in which managers are likely to be better informed than investors. Further, investment is sensitive to sentiment even when investors have an information advantage over managers by lagging the sentiment indicator by a year. Overall, the sensitivity of investment to sentiment appears to reflect both animal spirits and fundamentals.

Corporate investment has been weak since the global financial crisis (GFC) and demand-side factors, such as lower sales growth, explain more than half of this weakness. Low sentiment and heightened uncertainty weighed on investment during the GFC but have been less important factors since then.

This paper develops a network economy model to study the propagation of the COVID lockdown shock. Firms are related to each other through buyer–seller relations in the market for intermediate inputs. Firms choose production levels and input combinations using prices that emerge from local interactions. Nothing forbids trade at out-of-equilibrium prices. In such a setting, disequilibrium spills over from one market to another due to the interconnections between markets. These disequilibrium dynamics are capable of generating unemployment when workers released by contracting firms are not frictionlessly absorbed by expanding firms. We calibrate the model to the US economy using a data set with more than 200,000 buyer–seller relations between about 70,000 firms. Computational experiments on the calibrated economy suggest that the COVID lockdown generates a sizeable decline in GDP. The endogenously generated unemployment dynamics is a primary determinant of the cost of the lockdown.

This paper explores the effect of fiscal policy on the welfare of heterogeneous agents with different income sources over the business cycle. Policy experiments allow the government to choose the cyclical properties of fiscal policy instruments conditional on long-run levels to separately maximize the welfare of entrepreneurs and workers. This policy choice creates welfare conflicts between the two groups, which is confirmed by empirical evidence. The government maximizes workers’ welfare by choosing procyclical capital income tax rates and countercyclical labor income tax rates while it optimizes entrepreneurs’ welfare with countercyclical capital income tax rates and strongly countercyclical labor income tax rates. The socially optimal policy is a tradeoff between the welfare of entrepreneurs and workers. The welfare conflict holds when the government modifies the cyclical behavior of policy in a crisis, or it adjusts the long-run level and cyclical behavior at the same time.

I examine how money and trend inflation shaped US macroeconomic dynamics during the Great Inflation. I develop a business cycle model with positive trend inflation where money is allowed (but not required) to play a role in determining the equilibrium values of inflation and output through non-separable utility, adjustment costs for holding real balances, and the monetary policy reaction function. The Taylor principle changes in this environment. Targeting money guarantees price determinacy even with trend inflation, but these results are sensitive to the inclusion of non-separability and portfolio adjustment costs. The framework is combined with Greenbook data that detect the role of money in the policy reaction function. The response to money was likely not sufficiently strong to complement the reaction to inflation and counteract the high trend inflation observed during the pre-Volcker period, which most likely led to price indeterminacy.

We use a time-varying parameter dynamic factor model with stochastic volatility estimated using Bayesian methods to disentangle the relative importance of the common component in Federal Housing Finance Agency house price movements from state-specific shocks, over the quarterly period of 1975Q2 to 2017Q4. We find that the contribution of the national factor in explaining fluctuations in house prices is critical. We then use a Bayesian change-point vector autoregressive model that allows for different regimes throughout the sample period, to study the impact of aggregate supply, aggregate demand, (conventional) monetary policy, and term-spread shocks, identified based on sign restrictions on the national component of house price movements. While monetary policy and other shocks are found to be quite dominant early on, we find evidence that the national factor has been detached from the identified macroeconomic shocks since 2014, thus suggesting that a “national bubble” might be brewing again in the US housing market.

Although China’s monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy have often been simple reestimations or recalibrations of models originally designed to describe US or European monetary policy. In this paper, we aim to assess Chinese monetary policy and, in particular, monetary policy transmission through yield curves into the real economy. Our study takes into account the peculiarities of the Chinese economy: Namely, our model includes both China’s modern attempts at a market-based monetary policy as well as the “authority-based” one that is a relic of the original banking system. Besides, it considers the special nature of the Chinese treasury bond market, which is separated into two independent ones with very limited direct arbitrage opportunities between almost identical assets. Finally, it incorporates the role of real estate, which played an essential role in China during the last decade. Our results show that different monetary policy shocks cause asymmetric effects on macroeconomic and financial variables.

I study a model of self-fulfilling bank runs where government-provided deposit insurance covers small (retail) deposits but not large (wholesale) deposits. The share of the banking system that may be affected by runs depends on the distribution of retail and wholesale deposits across banks. The magnitude of runs is minimized if banks with both retail and wholesale depositors (reminiscent of commercial banks) coexist with banks that cater only to wholesale depositors (reminiscent of shadow banks). The shadow banking sector should be large enough to absorb enough wholesale deposits from commercial banks to keep them shielded from runs. In a decentralized equilibrium, the magnitude of runs tends to be larger than optimal as a result of wholesale depositors’ incentive to invest in the banks with the highest share of retail depositors.

This paper uses vector autoregression model analysis to identify monetary policy shocks on UK data using surprise changes in the policy rate as external instruments and imposing block exogeneity restrictions on domestic variables to estimate parameters from the viewpoint of the domestic economy. The results show large and persistent effects of monetary policy shocks on the domestic economy and point to the critical role of exchange rates and term premia. The analysis resolves important empirical puzzles of traditional recursive identification methods.