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Monetary Policy and Bond Prices with Drifting Equilibrium Rates

We propose a framework that reconciles drifting Treasury bond prices with stationary and predictable bond returns. Bond prices are drifting because they reflect the drift in average expected monetary policy rates over the life of the bonds. In our framework, deviations of bond prices from their drift should be stationary and can originate from term premia or temporary deviations from rational expectations in a behavioral framework. Empirically, modeling the drift in monetary policy rates using demographics and productivity trends, plus long-term in ation expectations, leads to stationary deviations of bond prices from their drift that predict future bond returns.

JEL codes: E43, E52, G12, J11.
Keywords: Monetary Policy Rule, Treasury Bond Yields, Term Structure, Drifting
Equilibrium Rate Drivers, Bond Return Predictability.

Modificato il 04/11/2020

Restarting the economy while saving lives under Covid-19


We provide, calibrate and test a realistic model of the spread of SARS-Cov-2 in an
economy with different risks related to age and sectors. The model considers hospital
congestion and response of individuals adjusting their behavior to the virus' spread.
We measure precisely the size of these effects using real data for Italy on intensive care
capacity and mobility decisions; thus our claim is that the tradeoffs we estimate are
quantitatively, rather than qualitatively, approximately correct.
We characterize the policies of containment of the epidemic that are efficient with
respect to number of fatalities and GDP loss. Prudent policies of gradual return to
work may save many lives with limited economic costs, as long as they differentiate
by age group and risk sector. More careful behavior of individuals induced by the
perceived cost of infection may contribute to further reduce fatalities.

 JEL-Code: I12, I18, D6, H84

 Keywords: Covid-19,SARS-Cov-2 SEIR model, post lockdown policies.

Press coverage: Il FoglioPromarketBloomberg;  LiberioltreSole24orePoliticoCorriere della seraFinancecue

Modificato il 09/11/2020

Factor Models with Drifting Prices



Modificato il 04/11/2020

The Network Effects of Fiscal Adjustments

This Version July 2018

A large and increasing body of empirical evidence has established that fiscal adjustments based on government spending cuts are less costly in terms of losses in output growth than those based on tax increases.  We show that the propagation of fiscal adjustment plans through the industrial network can in theory explain this evidence and that it does so in practice for the US economy. The heterogenous effects of tax-based and expenditure-based adjustments might depend  on the difference in their propagation channels in the network of industries.  A tax-based adjustment plan is mainly a supply shock which
propagates downstream (from supplier industries to customer industries) while an expenditure based plan is a  demand shock which propagates upstream (from customer industries to supplier industries). Empirical investigation of these channels on US data based on Spatial Vector Autoregressions reveals that tax based plans propagate through the network with an average output multiplier of close to -2, while the propagation of expenditure based plans does not lead to any statistically significant effect on growth. 
Keywords: industrial networks, fiscal adjustment plans, output. 
JEL codes : E60, E62.

Modificato il 11/09/2018

Nudging financial and demographic literacy: experimental evidence from an Italian Trade Union Pension Fund

This Revision April 2017 

Abstract: In this article, we present and test experimentally a low-cost, Internet-based, financial and demographic literacy program that we designed for implementation with the largest industrial pension fund in Italy. The program, Finlife (Financial Education and Planning for a Long Life) included 1) an instructional video and materials provided through the Internet; 2) an experimental design that explicitly allows to evaluate the impact of the instructional video and materials on financial and demographic literacy, as well as on short-term behavioral changes; 3) a follow-up to assess the stability of some of the experimental outcomes. Finlife was designed to be a low-cost and scalable approach to increase financial and demographic literacy, consistently with a ‘nudge’ philosophy. We show that Finlife delivered a substantially and statistically significant increase in financial and demographic literacy, as well as a push towards behaviors involving seeking more information on financial markets and choices related to financial planning.


Keywords: pensions, financial literacy, demographic literacy, field experiment, Italian Trade Union Pension Fund

JEL Classification: D91

Modificato il 25/05/2017

The Effect of Fiscal Consolidations: Theory and Evidence

This revision July 2018

Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.

JEL Codes: E62, H60.
Key words: fiscal consolidations, fiscal multipliers, fiscal components, fiscal plans.


Modificato il 30/08/2018

Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns
Carlo A. Favero

Modificato il 05/12/2008

The Predictive Power of the Yield Spread: further Evidence and a Structural Interpretation (Favero C.A., I.Kamynska and U.Soderstrom)
Carlo A. Favero with I. Kaminska and U.Soderstrom
(Jan 2005)

Modificato il 15/01/2009

Monetary-Fiscal Mix and Inflation Performance: Evidence from the U.S. (C.A. Favero and T.Monacelli)
Carlo A. Favero with Tommaso Monacelli
(revised January 2005)

Modificato il 15/01/2009

Modificato il 12/09/2008

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