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Working Paper
Escaping the Great Recession
Melosi, Leonardo; Bianchi, Francesco (2014-08-01)
While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers? behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short ...
Working Paper Series , Paper WP-2014-17

Working Paper
Modeling the Evolution of Expectations and Uncertainty in General Equilibrium
Melosi, Leonardo; Bianchi, Francesco (2013-09-01)
We develop methods to solve general equilibrium models in which forward-looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. Shocks to beliefs affect economic dynamics and ...
Working Paper Series , Paper WP-2013-12

Newsletter
Some inflation scenarios for the American Rescue Plan Act of 2021
Fisher, Jonas D. M.; Melosi, Leonardo; Bianchi, Francesco (2021-04-13)
The American Rescue Plan Act (ARP) signed into law on March 11, 2021, authorized approximately $1.9 trillion in federal government spending. ARP is widely expected to boost economic growth over the next two to three years—and significantly so early on. The upswing in growth is likely to increase resource pressures and therefore consumer price inflation as well. The potential for this channel to raise inflation substantially has attracted the attention of economic commentators, including Olivier Blanchard and Lawrence Summers. But the magnitudes and persistence of the possible increases in ...
Chicago Fed Letter , Issue 453 , Pages 8

Working Paper
Who is Afraid of Eurobonds?
Bianchi, Francesco; Melosi, Leonardo; Rogantini Picco, Anna (2022-10-03)
The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero lower bound (ZLB) constraint. At the same time, the current framework also exposes the EA to the risk of fiscal stagflation if one country were to refuse to implement the necessary fiscal consolidations. We study a new framework that allows EA policymakers to separate the need for short-run ...
Working Paper Series , Paper WP 2022-43

Working Paper
Usual Shocks in our Usual Models
Ferroni, Filippo; Fisher, Jonas D. M.; Melosi, Leonardo (2022-09-06)
We propose an event-study research design to identify the nature and propagation of large unusual shocks in DSGE models and apply it to study the macroeconomic effects of the Covid shock. The initial outbreak is represented as the onset of a new shock process where the shock loads on wedges associated with the model's usual shocks. Realizations of the Covid shock come with news about its propagation, allowing us to disentangle the role of beliefs about the future of the pandemic. The model attributes a crucial role to the novel Covid shock in explaining the large contraction in output in the ...
Working Paper Series , Paper WP 2022-39

Working Paper
The Signaling Effects of Fiscal Announcements
Melosi, Leonardo; Zanetti, Francesco (2022-08-19)
Fiscal announcements may transfer information about the government’s view of the macroeconomic outlook to the private sector, diminishing the effectiveness of fiscal policy as a stabilization tool. We construct a novel dataset that combines daily data on Japanese stock prices with narrative records from press releases about a set of extraordinary fiscal packages introduced by the Japanese government from 2011-2020. We use local projections to show that these fiscal stimuli were often interpreted as negative news by the stock market whereas exogenous fiscal interventions that do not convey ...
Working Paper Series , Paper WP 2022-38

Working Paper
Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength
Melosi, Leonardo; Faccini, Renato; Bianchi, Francesco (2020-05-12)
The COVID pandemic hit the US economy at a time in which the ability of policymakers to react to adverse shocks is greatly limited. The current low interest rate environment limits the Federal Reserve's ability to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. A solution to this impasse is a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under our coordinated strategy, the fiscal authority introduces an ...
Working Paper Series , Paper WP-2020-13

Working Paper
Long-Run Inflation Expectations
Fisher, Jonas D. M.; Melosi, Leonardo; Rast, Sebastian (2025-03)
Professional forecasters’ long-run inflation expectations overreact to news and exhibit persistent, predictable biases in forecast errors. A model incorporating overconfidence in private information and a persistent expectations bias—which generates persistent forecast errors across most forecasters—accounts for these two features of the data, offering a valuable tool for studying long-run inflation expectations. Our analysis highlights substantial, time-varying heterogeneity in forecasters’ responses to public information, with sensitivity declining across all forecasters when ...
Working Paper Series , Paper WP 2025-03

Working Paper
The Role of News about TFP in U.S. Recessions and Booms
Faccini, Renato; Melosi, Leonardo (2018-04-15)
We develop a general equilibrium model to study the historical contribution of TFP news to the U.S. business cycle. Hiring frictions provide incentives for firms to start hiring ahead of an anticipated improvement in technology. For plausibly calibrated hiring costs, employment gradually rises in response to positive TFP news shocks even under standard preferences. TFP news shocks are identified mainly by current and expected unemployment rates since periods in which average unemployment is relatively high (low) are also periods in which average TFP growth is slow (fast). We work out the ...
Working Paper Series , Paper WP-2018-6

Working Paper
Constrained Discretion and Central Bank Transparency
Bianchi, Francesco; Melosi, Leonardo (2014-07-01)
We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents? beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the ...
Working Paper Series , Paper WP-2014-16

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