We show that in the formalization of representativeness (Kahneman and Tversky (1972)) developed by Gennaioli and Shleifer (2010), overreaction and confidence are affected by uncertainty, as a news effect interacts with an uncertainty effect. In the time series domain, this interaction emerges in...

Concave hiring rules imply that firms respond more to bad shocks than to good shocks. They provide a unified explanation for several seemingly unrelated facts about employment growth in macro and micro data. In particular, they generate countercyclical movement in both aggregate conditional...

This paper is an empirical investigation into the role of credit history in determining the spread on sovereign bank loans. It employs an error-in-variables approach used in rational-expectations-macro-econometrics to set up a structural model that links sovereign loan spreads to realized...

We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to...

We build a model to study the interaction between default risk, policy changes, and financial frictions within a monetary union. The model features a centralised central bank and decentralised fiscal authorities. Countries have different reputations for fiscal stability, modelled as different...

We employ a new class of general equilibrium models with partially unfunded debt, as proposed in Bianchi et al. (2023), to study the relation between real interest rates and fiscal policy. Unfunded fiscal shocks generate a decline in real interest rates, while funded fiscal shocks cause an...

We build and estimate a novel TANK model with partially unfunded debt to study whether the record high debt-to-GDP ratio threatens US inflation stability. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. The central bank...

Low and stable inflation requires an appropriate fiscal framework aimed at stabilizing government debt. Historically, trend inflation is critically influenced by actual or perceived changes to this framework, while cost-push shocks only account for short-lasting movements in inflation. Before...

The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in lowdebt countries because of the zero...

We estimate a production-based general equilibrium model featuring demand- and supply-side uncertainty and an endogenous term premium. Using term structure and macroeconomic data, we find sizable effects of uncertainty on risk premia and business cycle fluctuations. Both demand- and supply-side...