Research
Published Articles
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How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To address these questions, we develop a two-sector, small open-economy model featuring imperfect international risk-sharing and household heterogeneity, capturing both the supply-side and demand-side effects of fragmentation. In the model, fragmentation takes the form of import-price increases or a decline in tradable-sector productivity. The sign and magnitude of its impact on inflationary pressures, and the appropriate policy response, depend not only on the direct effect of higher import prices or lower productivity on supply but also, crucially, on how aggregate demand adjusts to lower real incomes. In turn, this depends on the pace of fragmentation (gradual versus front-loaded) and other key structural factors highlighted by the model. We compare outcomes under Taylor-type monetary policy rules to a constrained-efficient allocation.Coverage: [Bracing for a More Inflationary World? by R. G. Rajan] [Between a Shock and a Hard Place: Trade Fragmentation and Monetary Policy − speech by Swati Dhingra] [ECB Report of the IRC Workstream on Trade Fragmentation: Navigating a Fragmenting Global Trading System] [ECB Monetary Policy Strategy Assessment 2025: A Strategic View on the Economic and Inflation Environment in the Euro Area]
Other versions: [CEPR Discussion Paper] [Bank of England Staff Working Paper] [BIS Working Paper] -
Sentiments, or beliefs about aggregate demand, can be self-fulfilling in models departing slightly from the complete information benchmark in the New Keynesian framework. Through its effect on aggregate variables, the policy stance determines the degree of complementarity in firms’ production (pricing) decisions and consequently, the precision of endogenous signals that firms receive. As a result, aggregate fluctuations can be driven by both fundamental and non-fundamental shocks. The distribution of non-fundamental shocks is endogenous to policy, introducing a novel trade-off between stabilizing output and inflation. Both strong inflation targeting and nominal flexibilities increase the variance of non-fundamental shocks, which are shown to be suboptimal. Moreover, the Taylor principle is no longer sufficient to rule out indeterminacy. Instead, an interest rate rule that places sufficiently low weight on inflation eliminates non-fundamental volatility and thereby the output-inflation trade-off.
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How does household heterogeneity affect the transmission of an energy price shock? What are the implications for monetary policy? We develop a small open economy TANK model that features labor and an energy import good as production inputs (Gas-TANK). Given complementarities in production inputs, higher energy prices reduce the labor share of total income. Due to borrowing constraints, this translates into a drop in aggregate demand. Higher price flexibility insures firm profits from adverse energy price shocks, further depressing labor income and demand. We illustrate how the transmission of shocks in a RANK versus a TANK depends on the degree of complementarity between energy and labor in production and the degree of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, the contractionary effect of an energy price shock on demand cannot be generalized to alternate supply shocks, as the specific nature of the supply shock affects how resources are redistributed in the economy.Coverage: [The path to 2 per cent − speech by Silvana Tenreyro] [Monetary policy in the face of supply shocks − speech by Silvana Tenreyro] [Structural changes in energy markets and implications for inflation and monetary policy − speech by Ida Wolden Bache]
Other versions: [Bank of England Staff Working Paper] [Centre for Macroeconomics Discussion Paper]
Code: Macroeconomic Model Database (NK_CDK24)
Books and Chapters
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This chapter explores the patterns of spatial income disparities within countries throughout the 20th Century. Following World War II, regional income gaps initially narrowed; however, the rate of convergence slowed in recent decades, with regional divergence evident in some countries. Despite narrowing income gaps, the incomplete nature of regional income convergence has led to persistent relative income disparities. We synthesize recent contributions seeking to explain these patterns, with an emphasis on insights from quantitative economic geography and macroeconomics. Finally, we examine the evidence on the impact of “place-based policies,” focusing on large-scale programs designed to promote regional convergence.
Working Papers
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We study a New Keynesian model where production inputs and pricing decisions are made under information frictions. Firm production is constrained by inputs that are chosen before shocks are realized, based on firms’ expectations of future demand. We show that the assumption of real rigidities versus nominal rigidities is not innocuous, as assuming the presence of either or both affects the passthrough of demand shocks to aggregate output and inflation. When the choice of production inputs is made under imperfect information about demand shocks, the impact on inflation is amplified while the impact on output is dampened. When both production inputs and pricing decisions are made under imperfect information about demand shocks, the pass-through to output is amplified while the impact on inflation is dampened. Additionally, we show that expectations about demand can behave similarly to a supply shock, as these expectations influence the natural level of output and enter the New Keynesian Phillips curve in a manner analogous to a cost-push shock. Empirical evidence suggests that inflation falls following a positive surprise in industrial production, consistent with a model featuring real rigidities.
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Productivity and Inflation DynamicsHow does higher productivity affect inflation? Productivity shifts both supply and demand, and its effect on inflation depends on their relative magnitude and timing, as well as on the monetary policy response. We distinguish between a one-off level shock that increases productivity temporarily (relative to trend) and a persistent rise in productivity growth. A one-off, temporary increase in productivity lowers marginal costs and raises potential output, generating downward pressure on the price level. Once prices adjust however, inflation returns to target. By contrast, higher productivity growth raises expected permanent income and stimulates demand, increasing the natural real rate. Absent a tightening of monetary policy, inflationary pressures may emerge. Anticipation effects are central: if demand rises ahead of realised supply gains, inflation can increase despite higher productive capacity. In an open economy, the sectoral incidence of the shock also determines the impact on inflation, through relative price adjustments. In summary, the inflationary consequences of productivity gains are a priori ambiguous and depend on the balance and timing of demand and supply responses, the composition of demand, and crucially, the monetary policy response.
Work in Progress
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Globalisation Without Convergence: Trade Shocks and Institutional DivergenceClassical political economy models suggest that economic integration leads to convergence in institutional and policy frameworks across countries. Recent developments challenge this view, as the rise of large emerging economies has had distributional impacts within advanced economies, leading to a political backlash against globalisation. Despite facing similar trade shocks, advanced economies have responded in different ways: the United States has adopted increasingly protectionist trade policies, while European economies have maintained openness alongside fiscal redistribution. This paper develops a political economy model in which trade policy and redistribution are jointly determined by majority voting. The model highlights a trade-off between compensating workers affected by import competition (through redistribution) and shielding exposed sectors through protectionism. The equilibrium response depends on underlying preferences for redistribution. The model predicts that low-redistribution economies respond to adverse trade shocks with protectionism, while high-redistribution economies sustain openness and expand transfers.
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Transportation Networks and Structural Transformation in RegionsSince 1900, rural regions in Europe experienced more rapid income growth and rapid industrialization than urban regions. Did lower transportation costs enable this rural catchup? We explore this question using historical data from Norway and European regions since 1900. In both cases, we find that improvements in market access accelerated structural transformation out of agriculture in regions that were initially specialized in agriculture. To interpret this pattern, we build a multi-sector dynamic spatial model equilibrium of structural transformation that we take to the data. Through counterfactuals exercises, we find that lower transportation costs accelerated structural transformation in rural locations, but are insufficient to account for the full catchup observed in the data. Our findings suggest alternative mechanisms are important in accounting for rural catchup across European regions.
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Conquering Distance? Geographical Isolation and Spatial DevelopmentWhat is the effect of past market access on spatial development? We study this question by constructing a granular measure of pre-industrial geographical isolation. Despite significant reductions in transportation costs over time, we find that a location’s historical isolation has a persistent effect on its modern spatial development. Specifically, we show that isolated locations were less likely to sustain cities between 1200 and 1800, with a lower GDP per capita between 1900 and 2015. A quantitative spatial model provides a structural interpretation of these findings. Through the lens of the model, we assess the relative importance of different channels of persistence. Both first and second-nature fundamentals are important drivers of the persistent impact of historical geographical isolation. Our results suggest that infrastructure investment undertaken at stages of development when the distribution of economic activity is malleable can have long-run implications.
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Leaning Against the Hurricane: Monetary Policy and Natural DisastersNatural disasters destroy productive capital and infrastructure, yet the speed of economic recovery varies across time and space. This paper studies whether monetary policy shapes post-disaster recovery by affecting the pace of reconstruction. While the loss of productive capacity and expansionary fiscal responses may generate inflationary pressures that call for tighter monetary policy, higher interest rates also increase the cost of financing reconstruction for households, firms, and governments, potentially slowing the recovery of supply capacity. We study this trade-off by combining cross-country evidence with quasi-experimental variation from historical hurricane paths, interacting exogenous disaster exposure with identified monetary policy shocks. This strategy identifies the causal effect of monetary policy on the persistence of disaster-induced economic losses. We develop and calibrate a New Keynesian model with disaster-induced capital destruction and endogenous reconstruction to quantify the role of monetary policy in promoting economic resilience and to characterize the optimal policy response. The results suggest that, unlike conventional supply shocks, the persistence of natural disaster shocks depends on the monetary policy environment, with important implications for stabilisation policy in an era of more frequent climate-related disasters.
Policy Writing
Discussions
Monetary Policy, Inequality, and Redistribution
Carbon Pricing and Firms' Expectations: Evidence from Italy
Optimal Monetary Policy during a Cost-of-Living Crisis
The Aggregate and Distributional Effects of a Carbon Tax
Pass-Through of Cost-Push Shocks
Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma
Experience-Based Heterogeneity in Expectations and Monetary Policy
Hitting the Elusive Inflation Target