Research
Working Papers
Non-Essential Business Cycles, with Michele Andreolli and Paolo Surico – Revise and Resubmit, Review of Economic Studies
This paper documents three main regularities on post-WWII data for the United States: (i) spending on non-essentials is more sensitive to the business-cycle than spending on essentials; (ii) earnings in non-essential sectors are more cyclical than earnings in essential sectors; (iii) non-essential industries employ a larger share of hand-to-mouth workers. We develop and estimate a two-sector New-Keynesian model with non-homothetic preferences, hand-to-mouth workers and sectoral labour force heterogeneity that is consistent with these findings. We use the model to revisit the transmission of stabilisation policies. A main finding is that the interaction of cyclical product demand composition and cyclical labour demand composition greatly amplifies the effects of monetary policy, which in our economy can be equivalently implemented by a mix of consumption and labour taxes. However, a VAT change applied only to non-essentials (only to essentials) has a far larger (smaller) impact than a uniform VAT change of the same size.
Online Appendix,VOXEU Summary Media coverage: JP Morgan Private Bank Insights Presented: PSE Macro Days, Barcelona School of Economics Summer Forum*, CREi/UPF*, Boston College*, LBS, Norges Bank*, EWMES, SEA*, RES*, ECB ChaMP Conference*, Midwest Macro, NASM of the Econometric Society*, SED, NBERSI (Monetary Economics)*, Oslo Macro Conference, Princeton, Bocconi*, LSE* *
Using administrative data on flood insurance, I document pervasive heterogeneity in the adaptive investments of American households. In response to increasing climate risks, affluent home-owners tend to elevate their properties whereas poorer households rely on higher levels of insurance. I develop a climate risk model with heterogeneous agents, housing insurance and investment in adaptation that can account for these findings. Counterfactual simulations reveal that as climate risk rises, financially constrained households avoid investing in adaption in favour of insurance subsidised by the government. As a result, the poorest households hold an increasing share of the housing stock most exposed to climate risks.
Presented: LBS, NYU Student Lunch, SED, EEA Congress 2025, Bank of England, DNB, IIES, Bocconi, LSE Finance, CREI, IFS, Imperial, Warwick
Capital Vintage and the Carbon Premium, with Simon Gilchrist and Joseba Martinez
We argue theoretically and show empirically that the carbon premium prices exposure to stranded fossil-fuel capital. In a vintage-capital model in which installed machines are locked into fuel requirements, policies that raise fossil-fuel operating costs lower firm value in proportion to expected future fuel use. The model predicts that policy-risk premia should be largest for higher-emissions firms with young physical capital because their fuel commitments have the longest remaining lives; by contrast, the premium should be weaker for firms with older capital and in sectors where physical capital is a less important factor of production. We document three facts that are consistent with this prediction. First, in the U.S. electricity sector, where generator-level data provide a direct measure of capital age, firms with younger fossil fleets underperform those with older fleets in response to climate-policy events that raise expected operating costs for fossil assets. Second, in the broad cross-section of U.S. public firms, a consistently positive carbon risk premium appears after the 2016 Paris Agreement and is concentrated in capital-intensive industries. Within these industries, the emissions premium is largest for firms with the youngest capital and indistinguishable from zero in the oldest capital-age quintile. Third, rolling estimates show that the young-capital premium is negative before the Paris Agreement, turns positive afterward, and rises when climate-policy attention is high. Finally, we form a portfolio that carries stranding risk by isolating young-minus-old exposure among high-emission firms relative to clean firms within capital-intensive industries. In a historical portfolio exercise, signal-timed exposure that goes long stranding risk when climate-policy salience is high and short when it is low delivers a post-Paris Agreement annualized Sharpe ratio of 1.01 and significant factor-adjusted alpha.
The Green Energy Transition in a Putty-Clay Model of Capital, with Simon Gilchrist and Joseba Martinez
We develop an integrated assessment model (IAM) that incorporates a putty-clay technology for capital accumulation in both the energy and final goods sectors. Final-goods production requires energy inputs that are produced by either a fossil-fuel burning sector or a clean energy sector. Following the IAM literature, fossil fuel usage leads to an accumulation of carbon that reduces aggregate production through a climate damage function that is external to the choices made by households and firms. The putty-clay features of the model imply delayed adjustment of fossil-fuel use to carbon taxes. Because of these delays, the carbon tax must be forty percent larger in the putty-clay model relative to a more standard model of vintage capital to meet the same carbon stock goals over a thirty year horizon. Green energy subsidies are also effective in reducing carbon stocks in the medium run but have a lower impact on longer-term fossil fuel use compared to carbon taxes of comparable size.
Recipient of a grant from the Wheeler Institute, supported by the Sui Foundation Presented: NYU Stern Macro lunch*, CREi/UPF*, Imperial*, Maryland*, Chicago*, SED*, 3CMFI, Bank of England
Inflation Composition and Monetary Stabilization, with Michele Andreolli, Chiara Vergeat and Paolo Surico
This paper develops a novel framework for business-cycle analysis in the Euro-area based on the distinction between necessity and discretionary spending as well as their associated industries. We apply our approach to quantify the heterogeneous effects of monetary policy, uncovering significant new regularities. Consumer spending, employment, corporate profits, stock returns and dividend payments exhibit greater cyclicality and greater sensitivity to monetary policy in discretionary industries, while prices respond more in sectors producing necessities. Wages, however, display limited sectoral asymmetry. Discretionary industries are characterized by a substantially higher concentration of hand-to-mouth workers, particularly among lower earners. Only consumer prices in necessity sectors are a significant leading indicator for GDP, whereas only employment rates in discretionary industries help predict HICP inflation. We show that a calibrated theoretical model with spending heterogeneity and labour market heterogeneity is consistent with these findings. We use the model to revisit the design of optimal monetary policy. We find that the European Central Bank can improve welfare by responding mostly to inflation in discretionary spending; doing so mitigates the adverse effects of recessions on hand-to-mouth workers and thus stabilizes aggregate demand and headline inflation more effectively.
Media coverage: Reuters, Expresso Central Banking Coindoo, Eco AIInvest Prepared for the ECB Forum on Central Banking, Sintra* Presented: EABCN/BoE Heterogeneous Agent Workshop, Boston College*, SEA Conference*, 24th Workshop on Macroeconomic Dynamics*, Empirical Macro Group at AEA Conference*, Fridays at the Boston Fed Workshop*, 14th International Research Forum in Monetary Policy*, BIS*, BSE Summer Forum*, SED*, EEA
Orders of Importance: Gas, Renewables and the Macroeconomy, with Francesca Diluiso and Boro Wanengkirtyo
Fossil fuel price shocks have been a persistent source of macroeconomic disruption, yet the rapid transition within the electricity sector means this may not always be the case. Natural gas shocks have been particularly amplified by the merit-order pricing system under which gas-fired plants set wholesale electricity prices across many economies. As renewables expand and eventually dominate generation, this dynamic reverses: gas shocks diminish in importance, but renewable intermittency emerges as the key macroeconomic risk within the electricity sector. We provide new empirical evidence from the UK on these intermittency shocks, using high-frequency news on unplanned nuclear plant and interconnector outages as an instrument. Our estimates identify significant effects already: outages increase inflation and depress growth. We develop a New Keynesian model with a stylised merit-order electricity sector, which matches this evidence and allows us to trace macroeconomic risks across transition stages. Under today’s generation mix, merit-order pricing amplifies gas shocks but partially insulates the economy from renewable intermittency. During the transition, the amplification reverses: as gas must frequently be dispatched to cover intermittent renewable shortfalls, fuel switching generates large, abrupt electricity price spikes that pose a more challenging stabilisation problem for policy. Once the transition is complete and storage technologies smooth intermittency, the system converges to a more stable low-cost equilibrium, with reduced macroeconomic exposure to both gas and renewable supply shocks.
Presented: World Congress of Environmental and Resource Economists 2026*, SURED 2026 Conference*, Summer School on Macroeconomic Modelling and Policy (University of Lorraine)*
* = Presentations by co-authors
The views here expressed are my own and do not represent those of the Bank of England.