This paper presents an analytical narrative of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2016 and set Greece apart from other crisis-hit economies: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that, as evidenced by the date, a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption--we call this behavior ''precautionary consumption''. We further show that capital controls mitigate the deposit flight and induce the reallocation of consumption towards formal goods.- Earlier version: Oxford WP, 01/2017, No 822
The anchoring of inflation expectations in stochastic environments is known to be achieved only under special circumstances, e.g. when the analysis is restricted to locally bounded equilibria near a non-stochastic steady state or when the ''right'' mix of monetary and fiscal policy is pursued. We abstract from such considerations and demonstrate that the communication of information by central banks about the future state of the economy can anchor inflation expectations as effectively, steering the path of inflation towards its target, with this regardless of how noisy communication may be. Furthermore, we show how direct communication can be recast in terms of forward guidance---an indirect form of communication.
Expectations and Fluctuations: The Role of Monetary Policy
This paper reconsiders the effects of expectations on economic fluctuations. It does so within a competitive monetary economy which features producers and consumers with heterogeneous information about productivity. Agents' expectations about productivity are coordinated by a noisy public signal, which generates non-fundamental--``noise''--shocks. I show that, depending on how monetary policy is pursued, noise shocks can resemble either demand shocks, as conventionally thought, or supply shocks--increasing output and employment, yet lowering inflation. On the policy front, I show that inflation stabilization is suboptimal, whereas output-gap stabilization is optimal.
- EUI Working Paper MWP 2013/18
The Length of Monopolies and the Timing of Innovation
This article evaluates the effects of the length of monopoly profits from new ideas on the timing of innovation. As in Shleifer (1986, Journal of Political Economy), I let firms in different sectors receive cost-saving ideas exogenously and sequentially, from which they can make temporary monopoly profits. In the presence of aggregate, cross-sectoral, demand externalities, firms might opt to postpone the implementation of their ideas so that they innovate together with firms from other sectors---and, as a result, a self-fulfilling ''implementation'' boom becomes realized. I show that a prolongation of the innovating firms' monopoly horizon limits the appeal of this possibility, and, for not too radical ideas, the benefit of their early implementation exceeds the cost of their delayed diffusion, leading to a welfare improvement.
- EUI Working Paper MWP 2014/24
Noise Shocks and Information Asymmetries (with F. Zanetti)
(preliminary draft available upon request)
We explore the effects of noise shocks under the lens of information asymmetries, and in the presence of price and wage rigidities. We show that information asymmetries between price-setters and wage-setters always mitigate the effects of noise shocks on price inflation and wage inflation, have an ambiguous effect on the real wage, while they amplify the effect of noise shocks on output.
On Minimum Wage Policies (with N. Kokonas) (work in progress)
Noisy Fluctuations and Nominal Credit Constraints: The Role of Monetary Policy (work in progress)