Florencia S. Airaudo

As a consequence of the policy responses to the COVID-19 crisis, central bank balance sheets, public debt, and liquidity increased in many developed economies. As the economies recover and inflation far exceeds the target, central banks face a challenge in how to manage their balance sheet. I study the macroeconomic effects of reducing the central bank balance sheet size, i.e., Quantitative Tightening (QT). I construct a Regime-Switching New Keynesian DSGE model calibrated to the US economy. The economy fluctuates between a monetary-led regime, a fiscally-led regime, and the zero lower bound on the monetary policy interest rate. The macroeconomic effects of QT crucially depend on the fiscal-monetary policy mix. In a monetary-led regime, QT effectively reduces inflation at the cost of increasing the government debt-to-GDP ratio. In contrast, unwinding the central bank balance sheet in a fiscally-led regime has little impact on inflation. The negative demand effect driven by QT is not enough to counteract the stimulative impact of negative real interest rates and fiscal stimulus.

We develop a model of green transition for a small open economy with endogenous energy efficiency, where production combines energy and traditional factors with limited short-run substitutability. Brown energy taxes reduce energy use and improve long-run efficiency but raise costs, causing inflation and output losses in the short run. Green public investment or subsidies avoid inflation and output losses but impose significant fiscal costs, raising spreads and reducing consumption. Without policies to mitigate debt increases, these measures do not improve welfare. Mixed policies using carbon tax revenues to finance green subsidies or investment are welfare-improving.

Long-run growth in Latin America over the last 50 years has been low and volatile in the presence of frequent Sudden Stops. We develop a theory that links long-run growth, financial frictions, and Sudden Stops in Emerging countries. Our theory exploits the fact that reversals in trade balance during Sudden Stops occur through sharp declines in imports, particularly of imported investment, rather than increases in exports. Imported investment, in turn, has a permanent impact on economic growth. We find that trend growth deteriorates during Sudden Stops and, even though trend shocks play a crucial role, financial frictions and shocks have a significant impact on its dynamics. We apply our model to the Sudden Stops in Argentina since the 1950s and find that financial crises have a strong permanent effect on the trend. Hence, to a large extent, the trend is the cycle.