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Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - MACROUNCERTINEQ (Uncertainty, Risk and Inequality: The Role of Macroeconomic Policies and Institutions)

Teaser

Summary

Understanding how policy and institutions shape macroeconomic outcomes is a top priority in policy and academic research agendas. A long-standing tradition in macro-econometrics has focused on aggregate data from national statistics and linear models to evaluate the effects of monetary and fiscal policies on consumption, employment, income, interest rates and output.

The financial crisis of 2007-2009, developments in computational power and, most importantly, availability of micro data have challenged this tradition in at least two very significant dimensions. First, uncertainty, volatility and risk have been appreciated as playing a very significant role in householdsâ€™ and firmsâ€™ individual decisions, in a way that cannot (and should not) be easily dismissed when analyzing macroeconomic dynamics. Second, changes in monetary policy, government spending, taxes, fiscal consolidation and institutions could engineer a (potentially unintended) redistribution of resources across society, in a way that may also impact, indirectly, on the same endogenous variables they were meant to stabilize.

The main goal of this research is to identify and evaluate the channels through which economic policies and institutional reforms affect macroeconomic outcomes through their impact on households and firms behaviour at the micro level. The analyses provide an unprecedented quantification of the contribution of popular monetary and fiscal interventions to the uncertainty surrounding the resources available to households, to the volatility of real activity and financial markets (and the mortgage market in particular) and to income and consumption inequality.

Work performed

The work performed under this research project can be grouped in three categories: (i) data construction and quality assessment; (ii) econometric analysis and model evaluation; (iii) dissemination.

The first step in data construction and quality assessment has involved not only the merge, integration and coordination of diverse data-sets characterized by observations at different frequencies but also the extensive evaluation of how the micro data compare and aggregate up relative to the time series recorded in national statistics. An important element of this part of the project has been to identify the pre-determined characteristics of households (such as having a mortgage) or firms (such being young and paying no dividends) that could be used to identify any possible heterogeneity in the responses of consumption, employment and output to monetary and fiscal policies across different groups.

The second part of the project has focused on the actual research design and the novel empirical strategy of combining macro identification schemes with micro data on household expenditure, regional income and mortgage rates. A main finding is that the financial conditions prevailing on the specific groups of the households and firms mentioned above, and in particular the role of debt and the composition of wealth between illiquid and liquid assets, shape the behaviour of households, firms and governments in a way that drive the aggregate response of consumption, employment and income to monetary and fiscal policies.

Finally, the research design as well as the main results of individual research projects have been disseminated through publications in working paper series and journals, through many presentations in leading academic and policy conferences around the world and two very high-profile conferences with leading academics, policy makers and practitioners I have co-organized at University College London and London Business School.
Programmes are available here:
https://sites.google.com/site/paolosurico/workshop-erc-2
https://sites.google.com/site/paolosurico/workshop-erc-3

Final results

The project has developed a novel empirical framework to study the heterogeneous effects of monetary and fiscal policies on economic activities through their impact on uncertainty, risk and inequality. In so doing, this research has made progress beyond the state of the art by showing how these heterogeneous effects can be used not only to discriminate among competing theoretical models but also to target particular groups of the population and therefore maximize the real effects of future policy interventions. While most of the analyses have focused on the behaviour of households, the strategy of assessing the effects of macroeconomic policies through the lens of micro data on individual agents has the potential to be readily applicable also to firms, in many different national and international settings.