Work in Progress

• Expectations and Constructive Monetary Uncertainty

What is the optimal forward guidance strategy of a central bank? In this paper, I formalize the information policy of a central bank using information design and analyse the impact of different forward guidance policies. The central bank can influence expectations to alter contemporaneous decisions, for example by providing information about the current and the future path of real shocks. Building on a stylized model of monetary policy with information frictions a la Lucas (1972), I show that strategic monetary uncertainty can provide intergenerational insurance and improve welfare. Then, I characterize the optimal forward guidance policy as a function of underlying real shock's variance. I use text analytical tools to identify implied probabilities from central bank communication events and show how this approach can be used for central bank communication design. The results extend to varying levels of central bank credibility and transparency concerns.

• Endogenous Fiscal Revenues

High levels of debt to GDP ratios are pressingly problematic for most of the world economies that faced multiple shocks and had no option but to borrow for unavoidable public expenditures. This paper explores the intriguing concept of sustainable debt rollover and provides a way to quantify the fiscal space of governments. I focus on economies with market power in production and limited stock market participation, leading to heterogeneous returns among households. While equity holders reap full benefits from their investments, bondholders receive the risk-free returns that are pushed down by the aggregate production markup. Consequently, this study reveals that the government can borrow beyond the present discounted value of budget surpluses, even amidst perpetual deficits, due to the endogenous fiscal revenues that arise from the heterogenous returns. These revenues represent the disparity between the fundamental and market value of debt. Leveraging this opportunity, the government can strategically roll over public debt while firms thrive with supernormal profits, fostering higher economic growth than the risk-free interest rate.

• Asset Market Liquidity and Structural Transformation  (co-PI, STEG PhD Grant #2635) joint with Carolina Kansikas