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: June 2018.
We study debt and default policy for sovereign countries 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 role of liquidity on sovereign spreads, debt capacity, and welfare, by performing quantitative exercises when our model is calibrated to match key features of the Argentinean default. We find that liquidity premia is a substantial component of spreads, increases during bad times and reductions in secondary market frictions improve welfare.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. This Version: October 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.
Optimal Debt-Maturity Management. Joint with Saki Bigio and Galo Nuno. This Version: October 2017.
We solve the problem of a government that wants to smooth financial expenses by choosing over a continuum of bonds of different maturity. The planner takes into account that adjusting debt too fast can affect prices. At the same time, it wants to insure against several sources of risk: (a) income risk, (b) interest rate (price) risk, (c) liquidity risk (prices can become more sensitive to issuance’s), and (d) the risks in the cost of default. We characterize this infinite dimensional control problem to aid the design of the debt-maturity profile in response to these forms of risk.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. September 2018.
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 debt and default policy for sovereign countries 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 role of liquidity on sovereign spreads, debt capacity, and welfare, by performing quantitative exercises when our model is calibrated to match key features of the Argentinean default. We find that liquidity premia is a substantial component of spreads, increases during bad times and reductions in secondary market frictions improve welfare.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. This Version: October 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.
Optimal Debt-Maturity Management. Joint with Saki Bigio and Galo Nuno. This Version: October 2017.
We solve the problem of a government that wants to smooth financial expenses by choosing over a continuum of bonds of different maturity. The planner takes into account that adjusting debt too fast can affect prices. At the same time, it wants to insure against several sources of risk: (a) income risk, (b) interest rate (price) risk, (c) liquidity risk (prices can become more sensitive to issuance’s), and (d) the risks in the cost of default. We characterize this infinite dimensional control problem to aid the design of the debt-maturity profile in response to these forms of risk.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. September 2018.
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.
