Ricardo Nunes

Professor Ricardo P. C. Nunes

Professor of Economics
PhD in Economics. Universitat Pompeu Fabra.
Friday 10.00-12.00


Areas of specialism

Macroeconomics; Monetary Policy; Fiscal Policy

University roles and responsibilities

  • Recruiting Committee
  • Direction of Centre of International Macroeconomic Studies
  • EDI Committee
  • Early Career Research Champion

    Affiliations and memberships

    Appointed to the Council of Economic Advisers to the Chancellor of the Exchequer, 2018-2020.


    In the media

    For media inquiries contact the press team below with your request.


    Research interests


    Postgraduate research supervision




    “Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey”, with Davide Debortoli and Pierre Yared, Journal of Political Economy. Forthcoming.

    Ricardo Nunes (2024)The Fiscal Theory of the Price Level by John H. Cochrane, In: Journal of economic literature American Economic Association
    C Bora Durdu, Ricardo Praca Cavaco Nunes, H Sapriza (2013)News and sovereign default risk in small open economies, In: Journal of International Economics91(1)pp. 1-17 Elsevier

    This paper builds a unified model of sovereign debt, default risk, and news shocks. News shocks improve the quantitative performance of the sovereign default model in a number of empirically-relevant dimensions. First, with news shocks, not all defaults occur during downturns. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt in line with more developed economies. Third, the model captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on welfare.

    D Debortoli, Ricardo Praca Cavaco Nunes, P Yared (2017)Optimal Time-Consistent Government Debt Maturity, In: The Quarterly Journal of Economics132(1)pp. 55-102 Oxford University Press

    This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spend- ing shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted debt positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly at because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.

    D Debortoli, J Maih, Ricardo Praca Cavaco Nunes (2014)Loose Commitment In Medium-Scale Macroeconomic Models: Theory And Applications, In: Macroeconomic Dynamics18(1)pp. 175-198 Cambridge University Press

    This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in the medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters model [American Economic Review 97(3), 586–606 (2007)], for which we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.

    D Debortoli, J Kim, J Lindé, Ricardo Nunes (2019)Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense?, In: Economic Journal129(621)pp. 2010-2038 Wiley

    Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilising economic activity also stabilises other welfare-relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-o¤ between stabilising inflation and resource utilisation, and also when imposing a moderate degree of interest rate volatility.

    M Bodenstein, J Hebden, Ricardo Praca Cavaco Nunes (2012)Imperfect credibility and the zero lower bound, In: Journal of Monetary Economics59(2)pp. 135-149 Elsevier

    As the nominal interest rate cannot fall below zero, a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a New Keynesian model during a large recession. We characterize the optimal monetary policy at the zero lower bound for the nominal interest rate if credibility is imperfect. Confronting monetary policy communication of the U.S. Federal Reserve and the Swedish Riksbank with such a framework, the credibility of both institutions is shown to have been low in the aftermath of the 2008 economic crisis.

    M Kumhof, Ricardo Praca Cavaco Nunes, I Yakadina (2010)Simple Monetary Rules under Fiscal Dominance, In: Journal of Money, Credit and Banking42(1)pp. 63-92 Wiley

    This paper asks whether interest rate rules that respond aggressively to inflation, following the Taylor principle, are feasible in countries that suffer from fiscal dominance. We find that if interest rates are allowed to also respond to government debt, they can produce unique equilibria. But such equilibria are associated with extremely volatile inflation. The resulting frequent violations of the zero lower bound make such rules infeasible. Even within the set of feasible rules the welfare optimizing response to inflation is highly negative. The welfare gain from responding to government debt is minimal compared to the gain from eliminating fiscal dominance.

    D Debortoli, Ricardo Praca Cavaco Nunes (2014)Monetary Regime Switches and Central Bank Preferences, In: Journal of Money, Credit and Banking46(8)pp. 1591-1626 Wiley

    Monetary policy objectives and targets are not necessarily constant over time. The regime-switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches by explicitly modeling policymakers' behavior and objectives. We show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.

    Ricardo Praca Cavaco Nunes (2009)On the Epidemiological Microfoundations of Sticky Information, In: Oxford Bulletin of Economics and Statistics71(5)pp. 643-657 Wiley

    We estimate and compare two models in which households periodically update their expectations. The first model assumes that households update their expectations towards survey measures. In the second model, households update their expectations towards rational expectations (RE). While the literature has used these specifications indistinguishably, we argue that there are important differences. The two models imply different updating probabilities, and the data seem to prefer the second one. We then analyse the properties of both models in terms of mean expectations, median expectations, and a measure of disagreement among households. The model with periodical updates towards RE also seems to fit the data better along these dimensions.

    Ricardo Praca Cavaco Nunes (2009)Learning The Inflation Target, In: Macroeconomic Dynamics13(2)pp. 167-188 Cambridge University Press

    We propose a framework in which expectations have a rational and a learning component. We describe a solution method for these frameworks and provide an application to the Volcker disinflation with the New Keynesian model. Although the model with rational expectations does not seem to account for this episode, results improve when a small and empirically plausible proportion of private agents are learning. The learning component is argued to be more robust and plausible than the rule-of-thumb expectations present in the hybrid Phillips curve.

    Ricardo Praca Cavaco Nunes (2010)Inflation Dynamics: The Role of Expectations, In: Journal of Money, Credit and Banking42(6)pp. 1161-1172 Wiley

    This paper estimates the Phillips curve allowing for a simultaneous role of rational and survey expectations. We consider both a reduced form and a structural specification of the Phillips curve. The results suggest that survey expectations can be a statistically significant component of firms' expectations and inflation dynamics. However, rational expectations continue to play a dominant role.

    D Debortoli, Ricardo Praca Cavaco Nunes (2013)Lack Of Commitment And The Level Of Debt, In: Journal of the European Economic Association11(5)pp. 1053-1078 Oxford University Press

    The tendency of countries to accumulate public debt has been rationalized in models of political disagreement and lack of commitment. We analyze in a benchmark model how the evolution of public debt is affected by lack of commitment per se. While commitment introduces indeterminacy in the level of debt, lack of commitment creates incentives for debt to converge to specific levels. One of the levels that debt often converges to implies no debt accumulation at all. In a simple example we prove analytically that debt converges to zero, and we analyze numerically more complex models. We also show in an imperfect credibility setting that a small deviation from full-commitment is enough to obtain these results.

    Alexander Doser, Ricardo Nunes, Nikhil Rao, Viacheslav Sheremirov (2022)Inflation Expectations and Nonlinearities in the Phillips Curve, In: Journal of Applied Econometrics Wiley

    This paper examines the presence of nonlinearities in the Phillips curve. We allow for a flexible form of nonlinearity and estimate a threshold regression model with the number and location of thresholds determined directly from the data. Over the estimation period starting in the late 1960s, we document that the linear model cannot be rejected if we properly control for inflation expectations. More precisely, not controlling for consumer expectations may lead the econometrician to overestimate the degree of nonlinearity. Our results hold with aggregate data, regional data, and controlling for cost-push shocks directly or using instrumental variables. While on the whole the case for nonlinearities is negligible, we examine historical episodes during which nonlinearities may have played a more important role but again do not find a significant case for nonlinearities.

    Davide Debortoli, Ricardo Nunes, Pierre Yared (2021)The Commitment Benefit of Consols in Government Debt Management, In: American Economic Review American Economic Association

    We consider optimal government debt maturity in a deterministic economy in which the government can issue any arbitrary debt maturity structure and in which bond prices are a function of the government's current and future primary surpluses. The government sequentially chooses policy, taking into account how current choices—which impact future policy—feed back into current bond prices. We show that issuing consols constitutes the unique stationary optimal debt portfolio, as it boosts government credibility to future policy and reduces the debt financing costs.

    Davide Debortoli, RICARDO PRACA CAVACO NUNES, Pierre Yared (2021)Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey, In: Journal of Political Economy University of Chicago Press

    According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not necessarily tax above the peak of the Laffer curve, even if it is ex ante optimal to do so.

    RICARDO PRACA CAVACO NUNES, Donghyun Park, Luca Rondina (2021)Imperfect credibility, sticky wages, and welfare, In: Journal of macroeconomics70103363 Elsevier Inc

    This paper studies optimal monetary policy under imperfect credibility in a New Keynesian model with staggered price and wage setting. In our imperfect credibility framework, the central bank commits to a policy plan but occasionally reneges on past promises with a given common knowledge probability. We find that the welfare gains from increasing credibility are approximately linear on the initial credibility level. We also find that the output-inflation stabilisation trade-off is nonmonotonic as higher credibility does not always reduce output volatility. The variance decomposition shows that wage markup shocks are the main driver of economic fluctuations and that these shocks are better contained, even in relative terms, when credibility is high. We then show that the degree of credibility impacts the effect of wage flexibility on welfare. When credibility is low, monetary policy is less potent and the economy can experience a feedback loop between wage volatility and price volatility. We show, though, that once wage markup shocks are taken into account, wage flexibility is usually welfare improving.

    D Debortoli, Ricardo Praca Cavaco Nunes (2010)Fiscal policy under loose commitment, In: Journal of Economic Theory145(3)pp. 1005-1032 Elsevier

    Due to time-inconsistency or political turnover, policymakers' promises are not always fulfilled. We analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised. In this loose commitment setting, the properties of labor and capital income taxes are significantly different than under the full-commitment and no-commitment assumptions. Because of the occasional reoptimizations, the average capital income tax is positive even in the long-run. Also, the autocorrelation of taxes is lower, their volatility with respect to output increases and the correlation between capital income taxes and output changes sign. Our method can be used to analyze the plausibility and the importance of commitment in a wide-class of dynamic problems.