CEF.UP – ECO Seminar

Friday – December 6^th 2024, at 13:00h | Room 305

Flight to Safety and New Keynesian Demand Recessions

Sebastian Merkel –  School of Economics, University of Bristol (England, United Kingdom)

Abstract:

“This paper builds a tractable New Keynesian model with idiosyncratic risk, incomplete markets, and nominal safe assets to study the transmission of uncertainty shocks through investors’ portfolio decisions and how monetary-fiscal policy can stabilize fluctuations in the demand for safe assets. A sudden increase in uncertainty triggers a flight to safety: investors reallocate portfolios from productive assets to safe assets. When prices are sticky, the real value of nominal safe assets cannot flexibly adjust. Instead, the flight to safety gives rise to aggregate demand recessions and overshooting in capital price adjustments. Conventional monetary policy that operates through interest rate changes alone has limited power in influencing household portfolios. Instead, fiscal policy plays a crucial role in price stabilization and optimal policy.”

CEF.UP – ECO Seminar

Friday – December 20^th 2024, at 13:00h | Room 305

Monetary Policy, Information and Country Risk Shocks in the Euro Area

Giovanni Ricco – University of Warwick (England, United Kingdom) and CREST – École Polytechnique (France)

Abstract:

“This study examines high-frequency market responses to ECB policy announcements, providing instrumental variables to identify four types of monetary policy shocks — conventional policy, forward guidance, quantitative easing/tightening, and asymmetric country risk — along with information shocks. Our findings show that non-linear information effects, especially prominent during episodes of acute market stress in euro area crises, are key to resolving puzzles in macroeconomic and financial variable responses reported in studies using high-frequency European data. The IVs obtained by controlling for these effects yield, in a VAR model, dynamic responses to monetary tightenings with contractionary impacts on output and prices.”