https://macropaperwarehouse.com/authors/oreste-tristani/Oreste TristaniHugo -- gohugo.ioen-usMon, 01 Jan 2024 00:00:00 +0000https://macropaperwarehouse.com/papers/who-bears-the-costs-of-inflation-euro-area-households-and-the-2021-2023-shock/Mon, 01 Jan 2024 00:00:00 +0000https://macropaperwarehouse.com/papers/who-bears-the-costs-of-inflation-euro-area-households-and-the-2021-2023-shock/<p>This paper measures the heterogeneous first-order welfare effects of the 2021-2023 inflation surge across households in the four largest euro area countries (Germany, France, Italy, Spain). Motivation: euro area headline HICP inflation peaked at 10.6% (year-on-year) in October 2022, driven mainly by energy and food prices following Russia&rsquo;s invasion of Ukraine; cumulatively over 2021-23 the price index rose roughly 14% in France and Spain, 16% in Italy and 20% in Germany. The classic question—who wins and who loses from surprise inflation, and through which channels—is the focus.</p>https://macropaperwarehouse.com/papers/monetary-policy-and-the-drifting-natural-rate-of-interest/https://macropaperwarehouse.com/papers/monetary-policy-and-the-drifting-natural-rate-of-interest/<p>This paper analyzes how monetary policy should respond to a long-run natural interest rate that can drift permanently — following a bounded random walk with upper bound 3 percent and lower bound 0 percent — when the zero lower bound (ZLB) on nominal interest rates is a binding constraint. The central result is that the long-run neutral rate (the real policy rate consistent with stable inflation in long-run equilibrium) should fall more than one-for-one with the long-run natural rate as the latter approaches zero, because the mere risk of future ZLB episodes — even when the economy is currently away from the ZLB — imparts a persistent downward bias on inflation expectations that can only be offset by maintaining a pre-emptive expansionary bias. Quantitatively, the model implies that the neutral rate should be zero as soon as the long-run natural rate falls to 75 basis points — well above the near-zero estimates prevailing in the late 2010s — and that the ZLB would bind one-third of the time under optimal policy when the natural rate fluctuates between 0 and 3 percent. Price level targeting with a 10-basis-point upward drift closely approximates optimal commitment policy and has the advantage of not requiring knowledge of the natural rate level.</p>