About

I am Professor of Economics at University College London, Professor II (adjunct) at NHH Bergen, and joint managing editor of the Review of Economic Studies.

My research covers business cycles, monetary policy, firm dynamics, inequality, startups and labour markets.

Research

Working papers

• The Macroeconomic and Welfare Effects of Targeted Inflation Support PackagesNew with Alan Olivi and Dajana Xhani

  Note on the Burnham energy support measures

  Abstract

  We evaluate the welfare effects of targeted fiscal responses to inflationary shocks, such as sector-specific subsidies and household-specific transfers. We do so in a multi-sector New Keynesian model nesting a flexible heterogeneous-household block, matched one-for-one to distributional data. We derive a micro-founded welfare loss function that decomposes into macroeconomic and distributional components, as well as into partial- and general-equilibrium effects. Social preferences for distributional fluctuations are disciplined using observed tax and transfer policies over the business cycle. Applying this framework to the UK’s 2022 cost-of-living package, which combined an energy price cap with targeted transfers, we obtain three findings. First, the package reduces welfare, at an average cost of about £150 per household, more than three times as large as a partial-equilibrium evaluation would suggest. Second, the dominant channel is an unintended redistribution, with large welfare losses borne by higher-income but heavily indebted households, who are negatively affected both by rising interest rates and by the taxes required to finance the package. Third, the standard central bank practice of “looking through” the mechanical effects of the energy price cap on CPI inflation amplifies these losses: under a rule that does not look through the cap, the same package would slightly raise welfare.

• Startup Types and Macroeconomic Performance in Europe with Ralph De Haas and Neeltje Van Horen CEPR Discussion Paper 17400

  Abstract

  We construct a new dataset of 1.3 million European startups and cluster them on observable entry characteristics. Five types recur across countries, industries, and cohorts, each with a distinct life cycle in productivity, employment, and survival. A calibrated firm dynamics model with heterogeneous entrants and financial frictions quantifies how policy can improve macroeconomic performance by shifting startup composition. Budget-neutral corporate tax changes, differentiated across startup types, can yield substantial productivity gains. Subsidies applied uniformly across types differ sharply in their composition effects and aggregate implications: capital subsidies raise output and productivity, labor subsidies lower both, and interest subsidies are roughly neutral.

• The Dark Corners of the Labor Market

  Abstract

  What can happen to unemployment after a severe disruption of the labor market? Standard models predict a reversion to a long-run steady state. By contrast, this paper shows that a large shock may set the economy on a path towards a different steady state with possibly extreme unemployment. This result follows from the empirical behavior of the U.S. job finding rate over the last 25 years. First, I estimate a reduced-form model for the labor market and show that—once allowing for nonlinearities—it implies a stable steady state around 5 percent unemployment and an unstable one around 10 percent unemployment. Second, I consider an extension of a basic Diamond-Mortensen-Pissarides (DMP) model in which multiple steady states arise due to skill losses upon unemployment, following Pissarides (1992). Based on only observed rates of job loss, this model endogenously explains most of the observed fluctuations in the job finding rate and the unemployment rate, thereby dramatically improving over a basic DMP model with a single steady state.

Publications

• Forth­coming
  Optimal Monetary Policy during a Cost of Living Crisis with Alan Olivi and Dajana Xhani American Economic Review

  Abstract

  How should monetary policy respond to sectoral shocks in a world where consumption baskets vary systematically across households? We present a multi-sector New-Keynesian model with generalized, non-homothetic preferences and inequality. The output gap is governed by a Marginal Consumer Price Index (MCPI), rather than the regular CPI. Policy trade-offs are shaped by a novel wedge in the New-Keynesian Phillips Curve (NKPC). Analytical results and quantitative simulations show that, following negative shocks to necessity sectors, the NKPC is shifted upward, increasing CPI inflation but decreasing the output gap. We find that the optimal policy response is relatively accommodative.

• 2025
  Stock Market Participation, Inequality and Monetary Policy with Davide Melcangi Review of Economic Studies 92(4), 2656–2690. CEPR DP 18853.

  Published version

  Abstract

  Recent literature has shown that the fraction of liquidity-constrained households in the population critically determines the mix of transmission channels of monetary policy. In this paper, we bring a different but important dimension of heterogeneity to the forefront: stock market participation. We show that the stock market participation rate not only shapes the mix of policy channels, but also heavily affects the aggregate responses. This happens as direct rebalancing effects and indirect equilibrium effects into investment are both increasing in the number of stock market participants, reinforcing each other. We show this in a quantitative New Keynesian model designed to account for the population share of stock market participants, their position in the income and wealth distribution, and their saving rates. The model implies that, as stock market participation has increased since the 1980s, the power of monetary policy on the real economy has strengthened considerably.

• 2023
  Expectations and Incomplete Markets with Evi Pappa and Morten O. Ravn Chapter 19 in R. Bachmann, G. Topa and W. van der Klaauw (eds.), Handbook of Economic Expectations, Academic Press, 569–612

  Published version

  Abstract

  In this chapter we examine the role of expectations in a Heterogeneous Agents New Keynesian model with labor market matching frictions (HANK&SAM). We focus on the macroeconomic effects of news and noise shocks, and the potential for purely expectations-driven aggregate fluctuations. The HANK&SAM model delivers new insights on the impact of expectational shocks through three mechanisms: First, because of incomplete markets, households' intertemporal tradeoffs induce a certain type of myopia and a time-varying precautionary savings motive; Second, income risk is endogenous due to labor market frictions; Third, there is a demand-supply interaction due to sticky prices. We characterize circumstances under which these features leave the economy more or less sensitive to expectational shocks.

• 2022
  Startups and Employment Following the COVID-19 Pandemic: A Calculator with Cristiana Benedetti-Fasil and Petr Sedláček Economic Policy 37(111), 507–533. Earlier versions in Covid Economics 13 and as CEPR DP 14671.

  Published version US calculator EU calculator VoxEU column

  Abstract

  Early indicators suggest that startup activity across countries is heavily affected by the COVID-19 pandemic and the associated lockdowns. At the same time, empirical evidence has shown that such disturbances may have long-lasting effects on aggregate employment. This paper presents a calculator which can be used to compute these effects under different scenarios regarding (i) the number of startups, (ii) the growth potential of startups, and (iii) the survival rate of young firms. We apply our calculator to the U.S. and four European countries: France, Germany, Italy and Spain. We find that employment losses can be substantial and last for more than a decade, even when the assumed slump in startup activity is only short-lived. Almost half of the long-run losses is caused by fewer high-growth firms, gazelles, starting up during the pandemic. Our results also suggest that the long-run effects of the pandemic may vary across countries substantially with Germany possibly being shielded due to its low degree of business dynamism.

• 2021
  Quantitative Easing with Heterogeneous Agents with Wei Cui Journal of Monetary Economics 123, 68–90. CEPR DP 13322.

  Published versionVoxEU column

  Abstract

  We study the effects of Quantitative Easing (QE) in a heterogeneous-agents model with liquid and partially liquid wealth, as well as nominal rigidities. The direct macroeconomic effect of QE is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to empirical studies. Therefore, the effects of QE on aggregate output and inflation are large, according to the model. Indeed, the estimated model reveals that QE interventions greatly dampened the U.S. Great Recession. However, QE may have strong and adverse distributional effects, compared to interest rate policy.

• 2021
  The Nature of Firm Growth Sterk ⓡ Sedláček ⓡ Pugsley (random author order) American Economic Review 111(2), 547–579. CEPR DP 12670.

  Published version Appendix VoxEU column Autocovariance moments (data)

  Abstract

  About half of all startups fail within five years, and those that survive grow at vastly different speeds. Using Census microdata, we estimate that most of these differences are determined by ex-ante heterogeneity rather than persistent ex-post shocks. Embedding such heterogeneity in a firm dynamics model shows that the presence of ex-ante heterogeneity (i) is a key determinant of the firm size distribution and firm dynamics, (ii) can strongly affect the macroeconomic effects of firm-level frictions, and (iii) helps understand the recently documented decline in business dynamism by showing a disappearance of high-growth startups (“gazelles”) since the mid-1980s.

• 2021
  Macroeconomic Fluctuations with HANK and SAM: An Analytical Approach with Morten O. Ravn Journal of the European Economic Association 19(2), 1162–1202. CEPR DP 11696.

  Published version Appendix VoxEU column CEPR version

  Abstract

  Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model which integrates Search and Matching (SAM) frictions in the labor market. The model features endogenous idiosyncratic earnings risk which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is downward pressure on real interest rates in recessions due to a precautionary saving motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate local indeterminacy of the intended steady state, and (c) nominal rigidities and incomplete markets are complementary in terms of amplifying the impact of shocks on the macro economy.

• 2019
  Reviving American Entrepreneurship? Tax Reform and Business Dynamism with Petr Sedláček Journal of Monetary Economics 105, 94–108 (Carnegie-Rochester-NYU Conference Series on Public Policy). CEPR DP 13073.

  Published version

  Abstract

  The 2017 Tax Cuts and Jobs Act slashed tax rates on business income and introduced immediate expensing of investments. Using a quantitative heterogeneous-firms model, we investigate the long-run effects of such tax reforms on firm dynamics. We find that they can substantially increase business dynamism, potentially offsetting the large decline in the U.S. startup rate observed over recent decades. This result is driven by indirect equilibrium forces: the tax reform stimulates firm entry, leading to an increase in labor demand and wages, which in turn makes firm selection more stringent. Related to this is a large boost of the number of firms and of aggregate output, investment and employment.

• 2018
  The Transmission of Monetary Policy through Redistributions and Durable Purchases with Silvana Tenreyro Journal of Monetary Economics 99, 124–137

  Published version

  Abstract

  This paper studies a redistribution channel for the transmission of monetary policy. Using a tractable OLG setting in which the government is a net debtor, we show that standard open market operations (OMO) conducted by Central Banks have significant revaluation effects that alter the level and distribution of wealth in the economy and the real interest rate. Specifically, expansionary OMO generate a negative wealth effect (the private sector as a whole is a net creditor to the government), increasing households’ incentives to save for retirement and pushing down the real interest rate. This, in turn, leads to a substitution towards durables, generating a temporary boom in the durable good sector. With search and matching frictions, a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand, raising aggregate employment. The mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions. The model shows that different monetary interventions (e.g., OMO versus helicopter drops) can have sharply different effects on activity.

• 2017
  The Growth Potential of Startups over the Business Cycle with Petr Sedláček American Economic Review 107(10), 3182–3210

  Published version Appendix

  Abstract

  This paper shows that employment in cohorts of U.S. firms is strongly influenced by aggregate conditions at the time of their entry. Employment fluctuations of startups are pro-cyclical, they persist into later years and cohort-level employment variations are largely driven by differences in firm size, rather than the number of firms. An estimated general equilibrium firm dynamics model reveals that aggregate conditions at birth, rather than post-entry choices, drive the majority of cohort-level employment variation, by affecting the share of startups with high growth potential. In the aggregate, changes in startup conditions result in large slow-moving fluctuations in employment.

• 2017
  Job Uncertainty and Deep Recessions with Morten O. Ravn Journal of Monetary Economics 90, 125–141. Open access. CEPR DP 7931.

  Earlier version

  Abstract

  We study a model where households are subject to uninsurable unemployment risk, price setting is subject to nominal rigidities, and the labor market is characterized by matching frictions and inflexible wages. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive. Lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk. Amplification derives from the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession.

• 2015
  Home Equity, Mobility, and Macroeconomic Fluctuations Journal of Monetary Economics 74, 16–32

  Published version

  Abstract

  How does a fall in house prices affect real activity? This paper presents a business cycle model in which a decline in house prices reduces geographical mobility, creating distortions in the labor market. This happens because homeowners face declines in their home equity levels, after which it becomes more difficult to provide the downpayment required for a new mortgage loan. Unemployed homeowners therefore turn down job offers that would require them to move. The model explains joint cyclical patterns in housing and labor market aggregates, as well as the puzzling breakdown of the U.S. Beveridge curve that occurred during 2009.

• 2011
  The Myth of Financial Innovation and the Great Moderation with Wouter J. den Haan Economic Journal 121(553), 707–739. CEPR DP 7507.

  Published version

  Abstract

  Financial innovation is widely believed to be at least partly responsible for the recent financial crisis. At the same time, there are empirical and theoretical arguments that support the view that changes in financial markets, in particular, innovations in consumer credit and home mortgages, played a role in the ‘great moderation’. This article questions empirical evidence supporting this view. Especially the behaviour of aggregate home mortgages changed less during the great moderation than is typically believed. A remarkable change we do find is that monetary tightenings became episodes during which financial institutions other than banks increased their mortgages holdings.

• 2010
  Credit Frictions and the Comovement between Durable and Non-durable Consumption Journal of Monetary Economics 57(2), 217–225

  Published version

  Abstract

  Frictions in lending between households have been proposed as a solution to the difficulties new-Keynesian models have in predicting a decline in both durable and non-durable consumption following a monetary tightening. By revisiting a standard new-Keynesian framework with collateral constraints, it is shown that the presence of such credit frictions in fact makes it more difficult to generate the joint decline. The intuitive reasons behind this result are provided, which should be helpful in developing models that are more successful in generating a positive comovement between durables and non-durables.

Work in progress

• The distributional case for interest rate smoothing (with Alan Olivi and Dajana Xhani)
• Endogenous markup fluctuations and inequality over the business cycle (with Alan Olivi and Dajana Xhani)
• The Marginal CPI: a new price index for macroeconomic analysis (with Alan Olivi and Dajana Xhani)
• Early Exit (with Petr Sedláček)

Policy reports and comments

• Beter inzicht in inflatie met een breder scala aan prijsindices (with Alan Olivi and Dajana Xhani). KVS Pre-adviezen 2023, Royal Dutch Economic Association.
• EU start-up calculator: impact of COVID-19 on aggregate employment (with Cristiana Benedetti-Fasil and Petr Sedláček). European Commission JRC Technical Reports, 2020. Scenario analyses for Austria, Belgium, Germany, Hungary, Italy and Spain; Denmark, Estonia, Finland, France, Latvia, Lithuania, Portugal and Sweden; Bulgaria, Croatia, Czechia, Luxembourg, Netherlands, Poland, Romania, Slovakia and Slovenia.
• Comment on “The Forward Fiscal Guidance Puzzle and a Resolution” by M. Canzoneri, D. Cao, R. Cumby, B. Diba and W. Luo. Journal of Economic Dynamics and Control 89 (2018), 47–49. Published version

Teaching

Curriculum vitae

Academic positions

Editorial roles

Affiliations

Education

Honours

PhD supervision

First supervisor, past students (first job). Davide Melcangi (Federal Reserve Bank of New York), David Zentler-Munro (University of Essex), Thomas Pugh (Bank of Canada), Dajana Xhani (Tilburg University), Matthew Read (Reserve Bank of Australia), Yongsoo Kim (Bank of Korea).

First supervisor, current students. Elena Casanovas Navarro, Thomas Lazarowicz, Ryohei Oishi, Jörn Onken, Jamie Lenney.

Second supervisor, past students (first job). Neele Balke (University of Chicago, postdoc), Benjamin Hemmingway (Bank of Lithuania), Chanwoo Kim (Bank of Korea), Similan Rujiwattanapong (Aarhus University), Andrew Preston (Bank of England).

Second supervisor, current students. Madigan Dockrill, Michael Major, Michael Tran, Zihao Wang, Shiya Lyu.

PhD committee member. Carlos Uribe (Queen Mary), Priscilla Fialho (UCL), Borja Petit (CEMFI), Nicolò Dalvit (Sciences Po), Richard Harrison (Birkbeck), Sebastián Diz (CREI), Philipp Schnattinger (Oxford), Bilal Tabti (LSE), Alais Martin-Baillon (Sciences Po), Eero Mäkynen (Turku), Kate Smith (UCL), Adi Sounarjo (LSE).

Selected professional activities