Publications
Are State and Time dependent models really different? Joint with Fernando Alvarez and Francesco Lippi. NBER Macro Annual 2016. Link to published version. 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.
Illiquidity in Sovereign Debt Markets. Joint with Yu Xu. Accepted, Journal of International Economics. This Version: December 2020. 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.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. Accepted, Minor Revisions Theoretical Economics. This Version: November 2021. Previous version: August 2020. 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 distributions over outcomes that are consistent with a subgame perfect equilibrium conditional on the observed history. We illustrate our main result by computing, conditional on an observed history, bounds on the maximum probability of a crisis, and bounds on means and variances over debt prices. In addition, we propose a general dynamic policy game and show how our main result can be extended to this general environment.
Illiquidity in Sovereign Debt Markets. Joint with Yu Xu. Accepted, Journal of International Economics. This Version: December 2020. 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.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. Accepted, Minor Revisions Theoretical Economics. This Version: November 2021. Previous version: August 2020. 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 distributions over outcomes that are consistent with a subgame perfect equilibrium conditional on the observed history. We illustrate our main result by computing, conditional on an observed history, bounds on the maximum probability of a crisis, and bounds on means and variances over debt prices. In addition, we propose a general dynamic policy game and show how our main result can be extended to this general environment.
Working Papers
Debt-Maturity Management with Liquidity Costs. Joint with Saki Bigio and Galo Nuño. This Version: November 2021. This version supersedes: A Framework for Debt-Maturity Management. We characterize the optimal debt-maturity management problem in the presence of liquidity costs. A government issues an arbitrary number of finite-maturity bonds and faces income and interest-rate risk, which can tempt it to default. Optimal issuances are spread out across maturities and are given by the ratio of a value gap over a liquidity coefficient that measures the price impact. The value gap is the proportional difference between the bond prices obtained by discounting with the international interest rates and with the domestic discount factor. This characterization allows us to quantify the contribution of different economic forces—impatience, yield-curve riding, expenditure smoothing, self-insurance, credit risk, and default incentives—in shaping the optimal debt maturity distribution. In an application, we estimate the liquidity coefficients using Spanish debt auction data and exploit the framework to evaluate Spanish debt management practices.
Liquidity and Risk in OTC Markets: A Theory of Asset Pricing and Portfolio Flows. Joint with Mahyar Kargar and Dejanir Silva. August 2021. We develop an asset-pricing model with heterogeneous investors and search frictions. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk-averse investors can direct their search towards dealers based on price and execution speed. Order flows affect the risk premium, volatility, and equilibrium interest rate. We propose a new solution method to characterize the equilibrium analytically. We assess the quantitative implications of the model in response to a large adverse shock. Consistent with the empirical evidence from the COVID-19 crisis, we find an increase in the risk premium and market illiquidity, and a decline in interest rates.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. RR Review of Economic Dynamics. May 2020. [Online Appendix]. [Slides]. The recent debate about the falling share of labor income has brought attention to the trends in income shares, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.
Liquidity and Risk in OTC Markets: A Theory of Asset Pricing and Portfolio Flows. Joint with Mahyar Kargar and Dejanir Silva. August 2021. We develop an asset-pricing model with heterogeneous investors and search frictions. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk-averse investors can direct their search towards dealers based on price and execution speed. Order flows affect the risk premium, volatility, and equilibrium interest rate. We propose a new solution method to characterize the equilibrium analytically. We assess the quantitative implications of the model in response to a large adverse shock. Consistent with the empirical evidence from the COVID-19 crisis, we find an increase in the risk premium and market illiquidity, and a decline in interest rates.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. RR Review of Economic Dynamics. May 2020. [Online Appendix]. [Slides]. The recent debate about the falling share of labor income has brought attention to the trends in income shares, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.
Work in Progress
A Monetary and Fiscal Policy Framework for Low Income Countries. Joint with Filiz Unsal.
The Term Structure of Credit and Liquidity Risk Premia. Joint with Yu Xu.
Macroprudential Policy with Many Assets. Joint with Jean Flemming and Facundo Piguillem.
The Term Structure of Credit and Liquidity Risk Premia. Joint with Yu Xu.
Macroprudential Policy with Many Assets. Joint with Jean Flemming and Facundo Piguillem.