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Industrial policies, global imbalances and technological hegemony
(2026-01) Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Fornaro, Luca; Wolf, Martin
We provide a framework that connects industrial policies to global imbalances and technological hegemony, and describe some empirical facts consistent with our model. We study the international spillovers triggered by industrial policies promoting high-tech sectors. Since high-tech goods and services are typically traded internationally, these policies boost the supply of tradable goods. Moreover, industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers.
Demand shocks in equity markets and firm responses
(2026-02-07) Broner, Fernando; Cortina, Juan J.; Schmukler, Sergio L.; Williams, Tomas
Tariffs and technological hegemony
(2026-01) Fornaro, Luca; Wolf, Martin
We provide a theory connecting trade policies to innovation and technological hegemony, based on the notion that high-tech clusters generate technological rents for the countries hosting them. We show that tariffs on high-tech imports may be used to steal technological rents from the rest of the world, by redirecting innovation activities from foreign to domestic firms. This strategy may lead to welfare gains, which however come at the expense of even larger welfare losses in the rest of the world. Tariffs may backfire even for the country imposing them if they are not well designed, or if the rest of the world retaliates.
Intertemporal pass-through
(2025-09) Ghassibe, Mishel; Wanengkirtyo, Boromeus; Yotzov, Ivan
Forward-looking pricing is at the core of modern macroeconomics, yet a gap remains between its theoretical foundations and their empirical validation. To bridge this gap, we study intertemporal pass-through (iPT): the sensitivity of firms’ desired prices to changes in their expected future marginal costs, a micro building block of foresight in aggregate inflation. On the empirical side, we obtain direct iPT estimates by combining UK firm-level survey data with idiosyncratic news shocks from a natural experiment: the March 2019 announcement of a future tariff schedule in the event of a ”No-Deal” Brexit. We find iPT to be largest among firms with the lowest frequency of price adjustment and those expecting the cost shock to arrive earlier. In addition, iPT is smaller among firms with state-dependent pricing and for larger shocks. On the theory side, we derive iPT in a model with heterogeneous adjustment frequencies and perceived shock horizons, formally reconciling our empirical findings on the drivers of iPT differences. We also use our setup to assess the general equilibrium consequences of iPT heterogeneity. In particular, we show that the sensitivity of aggregate inflation to changes in future costs is convex in non-adjustment frequencies and perceived shock horizons. As a result, iPT heterogeneity amplifies the degree of forward-lookingness of macroeconomic aggregates. Thus, announcements of future policies have contemporaneous effects, and heterogeneity in pricing decisions increase their magnitude.
Business cycles with pricing cascades
(2025-07) Ghassibe, Mishel; Nakov, Anton
Business cycles with pronounced inflation can have sectoral origins and often feature a growing share of price-adjusting firms. Rationalizing such phenomena requires enhancing our modeling toolkit. We do that by building a non-linear equilibrium multi-sector framework featuring a general input-output network and optimal decisions on the timing and size of price adjustments. The interaction of our ingredients creates equilibrium cascades: large movements in aggregates trigger price adjustment decisions on the extensive margin. Following demand shocks, such as monetary interventions, networks dampen cascades, thus slowing down price adjustment decisions and giving central banks substantial power to stimulate the real economy with limited inflationary consequences. In contrast, under supply shocks, networks amplify cascades, leading to fast increases in the frequency of repricing and large inflationary swings. Applied to Euro Area data, the interaction of networks with cascades allows to quantitatively match the surges in inflation and repricing frequency in the post-Covid era.
Hegemonic globalization
(2025-09-11) Broner, Fernando; Martin, Alberto, 1974-; Meyer, Josefin; Trebesch, Christoph
How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based “hegemonic globalization,” built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel “Global Treaties Database,” covering 77,000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade.
Fiscal stagnation
(2025-04) Fornaro, Luca; Wolf, Martin
We study public debt sustainability in an economy with endogenous productivity growth. Our model has two key features: i) financing large primary surpluses entails fiscal distortions that depress investment and growth, ii) low growth increases the primary surpluses needed to stabilize the public debt-to-GDP ratio. Negative shocks to fundamentals or pessimistic animal spirits may drive the economy into a state of fiscal stagnation, characterized by high public debt, large fiscal distortions and low productivity growth. We discuss policy options to avoid/escape fiscal stagnation.
Monetary policy for the green transition
(2025-04) Fornaro, Luca; Guerrieri, Veronica; Reichlin, Lucrezia
The Macroeconomics of data: scale, product choice, and pricing in the information age
(2025-03) Asriyan, Vladimir; Kohlhas, Alexandre
We document a substantial rise in the accuracy of U.S. firms’ expectations since the early 2000s, closely linked to firm-size dynamics and consistent with major advances in data-processing technologies. To study the macroeconomic implications, we develop a model of information production, in which information enables firms to optimize their scale, product choice, and pricing strategies. While information enhances the efficiency of resource allocation, it also facilitates price discrimination. The laissez-faire equilibrium is inefficient, warrants corrective policy interventions, and advances in data-processing technologies have ambiguous effects on social welfare. Calibrating our model to U.S. firm-level data, we find that data-processing advances have significantly increased TFP over the past two decades (5.3-6.7%), primarily by helping firms determine their optimal scale. Yet, the welfare benefits of these improvements have been modest (0.1-2.1%). Restricting data use, especially by large firms, could trigger larger welfare gains.
Heterogeneity and aggregate consumption: an empirical assessment
(2025-03) Debortoli, Davide; Galí, Jordi, 1961-
We provide an empirical assessment of a central implication of models with idiosyncratic income risk and incomplete markets: the existence of a role for the distribution of wealth in shaping the dynamics of aggregate consumption. Estimates of consumption Euler equation models extended to include wealth distribution statistics show the latter to have a negligible quantitative impact on aggregate consumption. This contrasts with the important role played by current disposable income, even when we use data for households with (relatively) high liquid wealth. The latter finding suggests the presence of a significant behavioral component behind the high sensitivity of consumption to current income.
Echoes and delays: time-to-build in production networks
(2025-02) Schaal, Edouard; Taschereau-Dumouchel, Mathieu
We study how time-to-build and delivery lags affect the propagation of sectoral and aggregate shocks in an economy with input-output linkages. Time-to-build significantly contributes to the persistence of shocks, with highly heterogeneous effects across sectors. We analyze delay shocks and demonstrate that bottlenecks can be identified by the product of a sector’s supplier and buyer centralities. Shocks propagate asynchronously through the network, generating endogenous fluctuations via an echo effect. These fluctuations arise due to the presence of loops in the network. We show that the Fourier spectrum of sectoral and aggregate output can be predicted from the durations and weights of the network’s dominant cycles. Sectoral comovements are complex and can be decomposed into the network’s dominant walks.
Scale-biased technical change and inequality
(2024-07-16) Reichardt, Hugo
Scale bias is the extent to which technical change increases the productivity of large relative to small firms. I show that this dimension of technical change is important for inequality. To illustrate the mechanism, I develop a tractable framework where people choose to work for wages or earn profits as entrepreneurs and where entrepreneurs choose from a set of available production technologies that differ in their fixed and marginal cost. Large-scale-biased technical change lowers entrepreneurship rates and increases top income inequality, primarily by concentrating business income. Small-scale-biased technical change does the opposite. I show the empirical relevance of scale bias by identifying the causal effects of adoption of two general purpose technologies that vary in scale bias, but are otherwise similar: steam engines (large-scale-biased) and electric motors (small-scale-biased). Using newly collected data from the United States and the Netherlands and a range of identification strategies, I show that these two technologies had opposite effects on firm sizes and inequality. Steam engines increased firm sizes and inequality, while electric motors decreased both. Consistent with scale bias (rather than skill bias), I find that adopting entrepreneurs were the main drivers of inequality increases after steam engine adoption.
America’s rise in human capital mobility
(2025-02-19) Althoff, Lukas; Gray, Harriet Brookes; Reichardt, Hugo
How did the US become a land of opportunity? We show that the country’s pioneering role in mass education was key. Unlike previous research, which has focused on father-son income correlations, we incorporate both parents in a new measure of intergenerational mobility that considers multiple inputs, including mothers’ and fathers’ human capital. To estimate mobility despite limitations in historical data, we introduce a latent variable method and construct a representative linked panel that includes women. Our findings reveal that human capital mobility rose sharply from 1850 to 1950, driven by a declining reliance on maternal human capital, which had been most predictive of child outcomes before widespread schooling. Broadening schooling weakened this reliance on mothers, raising mobility in both human capital and income over time.
Monetary policy and endogenous financial crises
(2024-07-27) Boissay, F.; Collard, F.; Galí, Jordi, 1961-; Manea, Cristina
What are the channels through which monetary policy affects financial stability? Can (and should) central banks prevent financial crises by tolerating higher price volatility? To what extent may monetary policy itself brew financial fragility? We study these questions through the lens of a textbook New Keynesian model augmented with capital accumulation and endogenous financial crises due to adverse selection in credit markets. Our main findings are threefold. First, monetary policy affects the probability of a crisis not only in the short–term (through its usual effects on aggregate demand) but also over the medium–term (through its effects on capital accumulation). Second, the central bank can significantly reduce the incidence of financial crises in the medium–term by tolerating higher price volatility in the short–term. Third, financial crises may occur after a long period of loose monetary policy, as the central bank abruptly reverses course and hikes its policy rate.
Monetary cooperation during global inflation surges
(2024-12) Fornaro, Luca; Romei, Federica
We study optimal monetary policy during times of global scarcity of tradable goods. The optimal monetary response entails a surge in inflation, which helps rebalance production towards the tradable sector. While the inflation costs are fully bore domestically, however, the gains in terms of higher supply of tradable goods partly spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy causing an unnecessarily sharp global contraction.
Why has construction productivity stagnated?: the role of land-use regulation
(2024-11-14) D’Amico, Leonardo; Glaeser, Edward; Gyourko, Joseph; Kerr, William; Ponzetto, Giacomo A. M.
We document a Kuznets curve for construction productivity in 20th-century America. Homes built per construction worker remained stagnant between 1900 and 1940, boomed after World War II, and then plummeted after 1970. The productivity boom from 1940 to 1970 shows that nothing makes technological progress inherently impossible in construction. What stopped it? We present a model in which local land-use controls limit the size of building projects. This constraint reduces the equilibrium size of construction companies, reducing both scale economies and incentives to invest in innovation. Our model shows that, in a competitive industry, such inefficient reductions in firm size and technology investment are a distinctive consequence of restrictive project regulation, while classic regulatory barriers to entry increase firm size. The model is consistent with an extensive series of key facts about the nature of the construction sector. The post-1970 productivity decline coincides with increases in our best proxies for land-use regulation. The size of development projects is small today and has declined over time. The size of construction firms is also quite small, especially relative to other goods-producing firms, and smaller builders are less productive. Areas with stricter land use regulation have particularly small and unproductive construction establishments. Patenting activity in construction stagnated and diverged from other sectors. A back-of-the-envelope calculation indicates that, if half of the observed link between establishment size and productivity is causal, America’s residential construction firms would be approximately 60% more productive if their size distribution matched that of manufacturing.
Fiscal stimulus with supply constraints
(2024-08) Fornaro, Luca
This paper provides a framework to study the macroeconomic implications of supply constraints. Supply constraints hamper firms’ ability to scale up production in response to surges in demand, disconnect prices from wages, and create non-linearities and instability in the aggregate Phillips curve. I use the model to show that binding supply constraints amplify the rise in inflation caused by a fiscal stimulus. This happens when the stimulus is large but transitory, when supply disruptions create shortages of intermediate inputs, and when public expenditure targets a few sectors of the economy. A persistent fiscal stimulus, instead, may boost firms’investment and productivity growth in the medium run, while having only a transitory impact on inflation.
An international perspective on inflation during the Covid-19 recovery
(2024-06) Fornaro, Luca; Romei, Federica
Endogenous production networks and non-linear monetary transmission
(2024-11) Ghassibe, Mishel
I develop a tractable dynamic sticky-price model, where input-output linkages are formed endogenously. The model delivers cyclical properties of networks that are consistent with those I estimate using sectoral and firm-level data, conditional on identified real and nominal shocks. A novel source of state dependence in nominal rigidities arises: the strength of complementarities in price setting and monetary non-neutrality increase in the number of suppliers optimally chosen by firms. As a result, the model simultaneously rationalizes the following observed non-linearities in monetary transmission. First, there is cycle dependence: the magnitude of real GDP’s response to a monetary shock is procyclical. Second, there is path dependence: non-neutrality of real GDP is higher following previous periods of loose monetary policy. Third, there is size dependence: larger monetary contractions shrink the network and generate a less than proportional decrease in GDP relative to smaller contractions.
Sectoral dynamics of safe assets in advanced economies
(2024-04-10) Castells Jauregui, Madalen; Kuvshinov, Dmitry; Richter, Björn; Vanasco, Victoria
What is the sectoral composition of the market for safety, and does it matter for economic stability? To address these questions, we construct a novel dataset of sectoral safe asset positions in 24 advanced economies since 1980. We document that the ratio of safe to total financial assets has remained stable in most countries, despite considerable growth in gross and net safe-asset positions relative to GDP. We find that fluctuations in safe-asset positions are mainly driven by the financial and the foreign sectors, with the real economy playing a muted role, indicating that financials in advanced economies have been increasingly intermediating safety within and across borders. We conclude by showing that increases in safe asset demand by foreigners -- or its counterpart, the supply by financials, -- are associated with expansions in domestic risky credit and lower subsequent output growth.

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