Abstract: In the standard New Keynesian (NK) framework, an increase in inflation expectations raises consumption. This conventional result rests on strong general equilibrium effects and the assumption that households do not perceive expected real income losses when inflation expectations rise. In this paper, I disentangle the underlying economic mechanisms and show that the consumption response can easily turn negative once empirically relevant features are taken into account. I decompose the total effect into an intertemporal substitution channel and a negative real income channel, under the empirically supported assumption that inflation expectations do not fully pass through to nominal wage expectations. In the Representative Agent NK model, consumption still increases because households also receive profits, which offset expected real wage declines. By contrast, in a stylized Heterogeneous Agent NK model, the total effect may turn negative if the profit channel is dampened and the disconnect between inflation and nominal wage expectations is sufficiently strong. I further examine the role of the wealth effect, which reinforces the possibility of a negative consumption response.Presented: Directorate General Research Seminar (European Central Bank; Frankfurt), 56th Annual Conference of the Money, Macro and Finance Society (University of Reading; Reading), 28th International Conference on Macroeconomic Analysis and International Finance (University of Crete; Crete), 6th Behavioral Macroeconomics Workshop (Heidelberg University and Bamberg University; Heidelberg), ERMAS 2024 (Babeș-Bolyai University and National Bank of Romania; Cluj-Napoca), 4th Sailing Macro Workshop (Sapienza University of Rome; Ortygia, Siracusa), 3rd Naples School of Economics PhD and Post-Doctoral Workshop (NSE; Naples), Workshop on Households’ Inflation Expectations, Czech National Bank (CNB; Prague)
with Jan Zemlicka
WP latest draft; ECB WP; NBS WP
Abstract: We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinity for a moderate myopia. Finite yet long-lasting windows dominate for stronger cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window depends on the speed of return to the target path when myopia plays a bigger role.Presented: Fall 2022 Midwest Macroeconomics Conference (Southern Methodist University; Dallas), ERMAS 2023 (University of Bucharest and National Bank of Romania; Bucharest), 2023 Expectations in Dynamic Macroeconomic Models Conference (Vienna University of Technology and Austrian National Bank; Vienna), Barcelona Ph.D. Workshop on Expectations in Macroeconomics (Barcelona School of Economics; Barcelona), 2nd Ventotene Workshop in Macroeconomics (Sapienza University of Rome; Ventotene), SASCA Ph.D. Conference in Economics (Ca’ Foscari University of Venice and University of Sassari; Venice).
with Jan Klacso, Reiner Martin, M. Udara Peiris, and Dimitrios P. Tsomocos
WP draft soon
Abstract: We develop a small open economy DSGE model with housing, heterogeneous households, and borrowing frictions to study how income-driven housing demand can lead to inefficient allocations in economies with low capital market participation. We show that borrower-based macroprudential tools, such as LTV limits, can reduce these inefficiencies and enhance financial stability resilience. We motivate our analysis with empirical evidence from converging European economies, especially Slovakia.Presented: ESCB Research Cluster 3 Workshop 2025 (Bundesbank; Frankfurt), Slovak Economic Association Meeting (SEAM 2025; Nitra)