Publications
Are State and Time dependent models really different? Joint with Fernando Alvarez and Francesco Lippi. NBER Macro Annual 2016.
Yes, but only for large monetary shocks. We show that in a broad class of models the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks, instead, depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is non-linear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We present some evidence of a non-linear effect of exchange rate changes on prices in a sample of flexible-exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.
Yes, but only for large monetary shocks. We show that in a broad class of models the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks, instead, depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is non-linear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We present some evidence of a non-linear effect of exchange rate changes on prices in a sample of flexible-exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.
Working Papers
Illiquidity in Sovereign Debt Markets. Joint with Yu Xu. This Version: August 2019.
We study sovereign debt and default policies when credit and liquidity risk are jointly determined. To account for both types of risks we focus on an economy with incomplete markets, limited commitment, and search frictions in the secondary market for sovereign bonds. We quantify the effect of liquidity on sovereign spreads and welfare by performing quantitative exercises when our model is calibrated to match key features of the Argentinean default in 2001. From a positive point of view, we find (a) that a substantial portion of sovereign spreads is due to a liquidity premium, and (b) the liquidity premium helps to resolve the "credit spread puzzle," by generating high mean spreads while maintaining a low default frequency. From a normative point of view, we find that reductions in secondary market frictions improve welfare.
A Framework for Debt-Maturity Management. Joint with Saki Bigio and Galo Nuño. This Version: April 2019. [Slides]
We characterize the optimal debt-maturity management problem of a government in a small open economy. The government issues a continuum of finite-maturity bonds in the presence of liquidity frictions. We find that the solution can be decentralized: the optimal issuance of a bond of a given maturity is proportional to the difference between its market price and its domestic valuation, the latter defined as the price computed using the government’s discount factor. We show how the steady-state debt distribution decreases with maturity. These results hold when extending the model to incorporate aggregate risk or strategic default.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. This Version: November 2018.
Dynamic policy games feature a wide range of equilibria. This paper provides a methodology for obtaining robust predictions. We begin by focusing on a model of sovereign debt although our methodology applies to other settings, such as models of monetary policy or capital taxation. The main result of the paper is a characterization of outcomes that are consistent with a subgame perfect equilibrium conditional on the observed history. Our methodology provides observable implications across all equilibria that we illustrate by characterizing, conditional on an observed history, the set of all possible continuation prices of debt and comparative statistics for this set; by computing bounds on the maximum probability of a crisis; and by obtaining bounds on means and variances. In addition, we propose a general dynamic policy game and show how our main result can be extended to this general environment.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. March 2019. [Slides]
Since the 1980’s the US economy has experienced a decline in the labor share, falling real rates, and accumulation of safe assets in the corporate sector. To study these facts, we propose a neoclassical growth model with capital-biased technological change, a production function with non-constant income shares (CES), and financial friction for firms. We discuss theoretically how risk sharing is distorted by the combination of changing shares of income and financial frictions, and how a hoarding of safe assets by firms emerges naturally as a tool to improve risk sharing. We calibrate our model to the US economy after 1980’s and show that low rates, rising capital shares, accumulation of safe assets by firms and risky assets by households, can be rationalized by persistent capital-biased shocks and limited risk sharing.
We study sovereign debt and default policies when credit and liquidity risk are jointly determined. To account for both types of risks we focus on an economy with incomplete markets, limited commitment, and search frictions in the secondary market for sovereign bonds. We quantify the effect of liquidity on sovereign spreads and welfare by performing quantitative exercises when our model is calibrated to match key features of the Argentinean default in 2001. From a positive point of view, we find (a) that a substantial portion of sovereign spreads is due to a liquidity premium, and (b) the liquidity premium helps to resolve the "credit spread puzzle," by generating high mean spreads while maintaining a low default frequency. From a normative point of view, we find that reductions in secondary market frictions improve welfare.
A Framework for Debt-Maturity Management. Joint with Saki Bigio and Galo Nuño. This Version: April 2019. [Slides]
We characterize the optimal debt-maturity management problem of a government in a small open economy. The government issues a continuum of finite-maturity bonds in the presence of liquidity frictions. We find that the solution can be decentralized: the optimal issuance of a bond of a given maturity is proportional to the difference between its market price and its domestic valuation, the latter defined as the price computed using the government’s discount factor. We show how the steady-state debt distribution decreases with maturity. These results hold when extending the model to incorporate aggregate risk or strategic default.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. This Version: November 2018.
Dynamic policy games feature a wide range of equilibria. This paper provides a methodology for obtaining robust predictions. We begin by focusing on a model of sovereign debt although our methodology applies to other settings, such as models of monetary policy or capital taxation. The main result of the paper is a characterization of outcomes that are consistent with a subgame perfect equilibrium conditional on the observed history. Our methodology provides observable implications across all equilibria that we illustrate by characterizing, conditional on an observed history, the set of all possible continuation prices of debt and comparative statistics for this set; by computing bounds on the maximum probability of a crisis; and by obtaining bounds on means and variances. In addition, we propose a general dynamic policy game and show how our main result can be extended to this general environment.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. March 2019. [Slides]
Since the 1980’s the US economy has experienced a decline in the labor share, falling real rates, and accumulation of safe assets in the corporate sector. To study these facts, we propose a neoclassical growth model with capital-biased technological change, a production function with non-constant income shares (CES), and financial friction for firms. We discuss theoretically how risk sharing is distorted by the combination of changing shares of income and financial frictions, and how a hoarding of safe assets by firms emerges naturally as a tool to improve risk sharing. We calibrate our model to the US economy after 1980’s and show that low rates, rising capital shares, accumulation of safe assets by firms and risky assets by households, can be rationalized by persistent capital-biased shocks and limited risk sharing.
