Persistent Slumps, Policy, and Heterogeneity

Tommaso Monacelli

Tommaso Monacelli
Principal Investigator

Team Members: Luigi Iovino, Dmitriy Sergeyev, Antonella Trigari

June 2022 - May 2025


We develop new theoretical frameworks to understand (i) the role of stabilization policies during persistent economic slumps and (ii) how the effects of those policies depend on the degree of heterogeneity in the economy.

On the policy side we study four related topics. First, the long-run costs and benefits of increasing the numerical inflation target as a viable option to exit a liquidity trap. We devise new strategies to investigate the empirical relevance of a negatively-sloped long-run Phillips Curve, and to uncover the determinants of its observed flattening in several advanced economies. Second, the design of unorthodox responses to the slump, such as Helicopter Money (HM). Namely, we study under what conditions HM can be viewed as an independent policy tool managed by a central bank without the necessary coordination with a fiscal authority, a policy arrangement of particular relevance for the Eurozone. Third, the role of expectations formation for the sustainability of public debt. Since debt sustainability is inherently a forward-looking concept, we study the implications of deviating from the standard hypothesis of rational expectations. Third, the design of new empirical methods – based on the role of anticipated fiscal shocks- to identify monetary-fiscal policy regimes in the data. Via appropriate counter-factual exercises, we assess the macroeconomic implications of each alternative regime of monetary-fiscal coordination, distinguishing between environments where agents may or may not feature data-grounded deviations from rational expectations.

In a slump, macroeconomic policy exhibits a two-way interaction with microeconomic heterogeneity. On the labor market side, we study the unique nature of the Covid recession on two dimensions. First, the role of temporary layoffs. Second, the vicious interaction between aggregate demand, unemployment risk and sectoral heterogeneity. On the financial side, we study the heterogeneous distribution of risk across intermediaries as a novel mechanism to understand the propagation of aggregate fluctuations and the likelihood of financial crises. On the firms’ side, we explore the interaction between heterogeneity in firms’ productivity and low interest rate policies to account for the dismal dynamic of aggregate TFP in several advanced economies following the Great Recession. Relatedly, we highlight the role of horizontal innovation and firm dynamics for stagnation traps, focusing on a novel role in macroeconomic modelling played by the cross-sectional distribution of managerial abilities.

Other Research Units:

  • Università degli Studi di Pavia - Coordinator: Guido Ascari
  • Università degli Studi di Roma "La Sapienza" - Coordinator: Salvatore Nisticò
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This project has been funded by Ministero dell'università e della ricerca under the framework PRIN 2020 - Progetti di Ricerca di Rilevante Interesse Nazionale