Financial Fluctuations, Business Cycle, and Inflation - Favero

Team Members

Giovanni Caggiano      (Università degli Studi di Padova)
Efrem Castelnuovo      (Università degli Studi di Padova)
Tommaso Monacelli     (Università Bocconi)
Luca Sala                     (Università Bocconi)
Antonella Trigari            (Università Bocconi)

This research unit is part of the project Macroeconomic Fluctuations, Economic Policy , and Asset Prices, which consists of 5 Research Units coordinated by Carlo Favero.

Abstract
This project studies the interactions between financial shocks and macroeconomic fluctuations. It consists of two subprojects:
(i)) financial shocks and unemployment
(ii) noise and information in stock prices and macroeconomic dynamics.

Project (i) starts from the observation that the unfolding of the recent financial crisis has forcefully brought to the attention the link between financial and labor markets. A shock originating from the interbank loan market has seen its waves propagating to labor markets with increasing intensity. This project aims at exploring the effects of financial disturbances on the rate of unemployment.

Project (ii) starts from the literature that proposes a decomposition of stock prices into a persistent “information” component and a transitory “noise” component to identify and to estimate the role that fluctuations in these two components have in shaping macroeconomic dynamics of a variety of countries and aggregates, including the U.S. the Euro area, the United Kingdom, and Japan. Different approaches will be used to perform the transitory permanent decomposition using alternatively a latent-factor approach and an approach relying upon slow moving demographics trends to identify the information component of stock prices.