In the aftermath of the Global Financial Crises a large part of macro-econometricians posed the argument that the main national aggregates can mislead the identification of shocks that are policy-relevant, and that their 'true' effects are often masked in linear models. In the last decade the research has put in place two main strategies that address these issues: One embraces the identification of reduced-form macro models through both IVs (Stock and Watson, 2018), proxy variables (Caldara and Herbst, 2019), and granular IVs (Gabaix, 2020). The latter see aggregate fluctuations as the result of idiosyncratic source of variations that can be exploited to retrieve structural shocks, and whose effects are sizeable at a macroeconomic level. The second strategy envisages the use of a non-linear models that allow to study the impact of those shocks in different regimes of the economy (Cogley and Sargent, 2001; Auerbach and Gorodnichenko, 2012, to name a few) or in different countries (Canova et al. 2007). This project combines these two strategies with the aim of studying three main recent challenges for the applied macroeconomic research: (1) the interplay between monetary and macro-prudential policies; (2) shocks related to climate-change; (3) the asymmetric macro effects of the pandemic Covid-19. These questions of general interest are possibly the main one that policy makers, particularly central banks, are called to face over the next years. By mean of a solid empirical evidence, the goal of the project is to outline 'new' sources of macroeconomic instability that the ECB should take care in fulfilling her policy mandate.
Work 1: By focusing on the credit market tightness arising from the macroprudential stance, the project aims at deepening the implications for monetary policy of the central bank's need to coordinate its behaviour with that of a financial authority. Starting from the observation that macroprudential decisions are less frequent then monetary policy ones, the problem can be treated similarly to the issue of fiscal-monetary policies coordination (Galati and Moessner, 2013). The central bank can then incorporate the macroprudential stance in its decision rule. However, financial regulation may misshape the transmission channel of monetary policy in a non-linear way. For example, during downturns, a tighter financial regulation may weaken the monetary stimulus to credit, and, during upswings, a tighter financial regulation may favour the lean against the wind of the central bank (Lucidi and Semmler, 2020a). This project can shed new light on those benefits and the costs of coordinating the two policies in the Euro Area.
Work 2: Physical losses related to direct damages, higher maintenance costs, disruption and lower labour productivity may ultimately affect profitability and default risk. Uninsured risks deteriorate the balance sheets of affected households and corporations and hence their lender banks (Campiglio et al., 2018). At the same time, the adjustment towards a low-carbon economy raises numerous policy challenges for central bankers (Carbone et al., 2018). There is a need to investigate further on whether central banks should deal with climate risks and what are the consequences for both the economic and financial system. However, though climate policies are potential source of shocks, aggregate estimates hardly can capture individual risks and their propagation (Battiston et al. 2017). The fact that many low-carbon firms are too small to issue corporate bonds and have weaker credit ratings may favour carbon-intensive assets purchases in financial markets when the central bank implements a large assets's purchase program (Matikainen et al., 2017). This would subvert the plan of central banks to encourage financial markets to account for climate-related risks, as widely claimed by the ECB's President Lagarde. This project is intended to provide policy indication to central banks, for instance, whether the benefits of a 'green' quantitative easing by the ECB are higher than its costs in terms of both price and financial stability.
Work 3: The costs of the pandemic Covid-19 are well described by the dramatic economic outlook of countries for the year 2020. However, little is known about the nature of the shocks and how economic costs transmit from one country to another. This project speculates on the fact that, though the primary effect of the lock-down measures implemented by countries at the spreading of the pandemic concerned mostly economic supply, available data can allow to identify the origin of the shock before those measures. Which is, people began to cancel or postpone their travels around the world as the pandemic started in the country they live. This effect is clearly reflected in monthly data of air passengers. Therefore, the project can provide a guideline for policy makers to better understand the origin and the transmission of the pandemic and possible solutions to coordinate policies in an international environment where public debts are required to increase rapidly.
- Battiston, S., Mandel, A., Monasterolo, I., Schuetze, F. and Visentin, G., A climate stress-test of the EU financial system, Nature Climate Change, Vol. 7, 2017, pp. 283-288.
- Galati, Gabriele, and Richhild Moessner. Macroprudential policy: a literature review. Journal of Economic Surveys 27.5 (2013): 846-878.
- Lucidi, F. S., & Semmler, W. (2020a). Nonlinear Credit Dynamics, Regime Switches in the Output Gap and Supervisory Shocks. Regime Switches in the Output Gap and Supervisory Shocks (August 13, 2019).
- Campiglio, Emanuele, et al. Climate change challenges for central banks and financial regulators. Nature Climate Change 8.6 (2018): 462-468.
- Carbone S., Giuzio M. and Mikkonen K. (2019), Climate risk-related disclosures of banks and insurers and their market impact, Financial Stability Review, ECB, November 2019.
- Matikainen, Sini, Emanuele Campiglio, and Dimitri Zenghelis. The climate impact of quantitative easing. Policy Paper, Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science (2017).