Monetary Policy in the COVID Era and Beyond: The Fed vs the ECB.

With Carlo Favero (2023).

This study examines monetary policy during and post-COVID by analysing innovative rules based on data from before the pandemic. It models fluctuating monetary policy rates using a stochastic trend, linking potential output growth, demographic age distribution, and inflation expectations to the prevailing interest rate trends in both the US and the Eurozone. The cyclical variations in short-term rates are associated with monetary policy through the conventional Taylor rule indicators. Whilst the standard model is robust for the US both in and out of sample, the Eurozone displays less consistent in-sample results and marked deviations in out-of-sample tests. Addressing the ECB's concerns about bond market fragmentation doesn't yield better results. Instead, synchronising the Eurozone's cyclical rates with those of the US proves more effective.

Link to the paper: Here.

Modelling the Term Structure with Trends in Yields and Cycles in Excess Returns.

With Carlo Favero (2023).

This paper proposes an Affine Macro Term Structure model in which yields are drifting, sharing a common stochastic trend driven by the drift in short-term (monetary policy) rates and excess returns are stationary as the compensation for risk is driven by the cycles in yields. We apply the approach to US data and compare the empirical results from the new specification with those obtained from standard Affine Term Structure models. The cycle-trend decomposition- based Affine Term Structure model produces much better forecasts of the dy- namics of yields and, consequently, different and stationary dynamics for the term premia.

Link to the paper: Here.