Publications and Accepted
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. Journal of International Economics, Volume 137, July 2022. This Version: December 2020. Link to published version. 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.
Debt-Maturity Management with Liquidity Costs. Joint with Saki Bigio and Galo Nuño. This Version: October 2022. Journal of Political Economy: Macroeconomics, March 2023. This version supersedes: A Framework for Debt-Maturity Management. We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. Liquidity costs induce a value gap: a difference between the market price of a bond and the valuation of the bond using the government's discount factor. Optimal issuances are spread out across maturities and are dictated by the value gap scaled by a liquidity coefficient. This characterization allows us to quantify how the government's relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. Forthcoming, Theoretical Economics. This Version: November 2023. 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.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. Review of Economic Dynamics. October 2024.
The debate about the falling labor share has brought attention to the income-shares trends, but less attention has been devoted to their variability. 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 shaped by the combination of idiosyncratic risk and moving shares. In this setting, accumulation of safe assets by capitalists and risky assets by workers emerges naturally as a tool to insure income shares' risk. Then, in a quantitative exploration we 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.
Illiquidity in Sovereign Debt Markets. Joint with Yu Xu. Journal of International Economics, Volume 137, July 2022. This Version: December 2020. Link to published version. 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.
Debt-Maturity Management with Liquidity Costs. Joint with Saki Bigio and Galo Nuño. This Version: October 2022. Journal of Political Economy: Macroeconomics, March 2023. This version supersedes: A Framework for Debt-Maturity Management. We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. Liquidity costs induce a value gap: a difference between the market price of a bond and the valuation of the bond using the government's discount factor. Optimal issuances are spread out across maturities and are dictated by the value gap scaled by a liquidity coefficient. This characterization allows us to quantify how the government's relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.
Robust Predictions in Dynamic Policy Games. Joint with Juan Xandri. Forthcoming, Theoretical Economics. This Version: November 2023. 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.
The Macroeconomics of Hedging Income Shares. Joint with Adriana Grasso and Facundo Piguillem. Review of Economic Dynamics. October 2024.
The debate about the falling labor share has brought attention to the income-shares trends, but less attention has been devoted to their variability. 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 shaped by the combination of idiosyncratic risk and moving shares. In this setting, accumulation of safe assets by capitalists and risky assets by workers emerges naturally as a tool to insure income shares' risk. Then, in a quantitative exploration we 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.
Working Papers
Liquidity and Risk in OTC Markets: A Theory of Asset Pricing and Portfolio Flows. Joint with Mahyar Kargar and Dejanir Silva. RR Journal of Finance. August 2023. We develop an asset-pricing model with heterogeneous investors, search frictions, and wealth effects. Trade is intermediated by risk-neutral dealers subject to capacity constraints. Risk averse investors direct their search towards dealers based on price and execution speed. Portfolio asymmetry relative to target amplifies the risk premium, and portfolio dispersion leads to a decline in the risk-free rate and higher trading volume, bid-ask spreads, and trading delays. We propose a new solution method to characterize the equilibrium analytically. Model’s quantitative implications for asset prices and liquidity conditions in response to a large adverse shock are consistent with the evidence from March 2020.
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.
