Working papers results

We explore the determinants of yield differentials between sovereign bonds in the Euro
area. There is a common trend in yield differentials, which is correlated with a measure
of the international risk factor. In contrast, liquidity differentials display sizeable heterogeneity
and no common factor. We present a model that predicts that yield differentials
should increase in both liquidity and risk, with an interaction term whose magnitude and
sign depends on the size of the liquidity differential with respect to the reference country.
Testing these predictions on daily data, we find that the international risk factor is consistently
priced, while liquidity differentials are priced only for a subset of countries and
their interaction with the risk factor is crucial to detect their effect.

This paper brings together two strands of the empirical macro literature:
the reduced-form evidence that the yield spread helps in forecasting output
and the structural evidence on the difficulties of estimating the effect of monetary
policy on output in an intertemporal Euler equation. We show that
including a short-term interest rate and inflation in the forecasting equation
improves the forecasting performance of the spread for future output but the
coefficients on the short rate and inflation are difficult to interpret using a
standard macroeconomic framework. A decomposition of the yield spread
into an expectations-related component and a term premium allows a better
understanding of the forecasting model. In fact, the best forecasting model for
output is obtained by considering the term premium, the short-term interest
rate and inflation as predictors. We provide a possible structural interpretation
of these results by allowing for time-varying risk aversion, linearly related
to our estimate of the term premium, in an intertemporal Euler equation for
output.

We study optimal monetary policy in two prototype economies with sticky prices and credit
market frictions. In the first economy, credit frictions apply to the financing of the capital stock,
generate acceleration in response to shocks and the financial markup (i.e., the premium on
external funds) is countercyclical and negatively correlated with the asset price. In the second
economy, credit frictions apply to the flow of investment, generate persistence, and the financial
markup is procyclical and positively correlated with the asset price. We model monetary policy
in terms of welfare-maximizing interest rate rules. The main finding of our analysis is that strict
inflation stabilization is a robust optimal monetary policy prescription. The intuition is that, in
both models, credit frictions work in the direction of dampening the cyclical behavior of inflation
relative to its credit-frictionless level. Thus neither economy, despite yielding different inflation
and investment dynamics, generates a trade-off between price and financial markup stabilization.
A corollary of this result is that reacting to asset prices does not bear any independent welfare
role in the conduct of monetary policy.

We provide a long term perspective on the individual retirement behavior
and on the future of early retirement. In a cross-country sample, we
find that total pension spending depends positively on the degree of early
retirement and on the share of elderly in the population, which increase
the proportion of retirees, but has hardly any effect on the per-capita pension
benefits. We show that in a Markovian political economic theoretical
framework, in which incentives to retire early are embedded, a political
equilibrium is characterized by an increasing sequence of social security
contribution rates converging to a steady state and early retirement. Comparative
statics suggest that aging and productivity slow-downs lead to
higher taxes and more early retirement. However, when income effects
are factored in, the model suggests that periods of stagnation - characterized
by decreasing labor income - may lead middle aged individuals to
postpone retirement.