Research
Heterogeneous Agents Dynamic Spatial General Equilibrium
I develop a dynamic model of migration and labor market choice with incomplete markets and uninsurable income risk to quantify the effects of international trade on workers’ employment reallocation, earnings, and wealth. Macroeconomic conditions in different labor markets and idiosyncratic shocks shape agents’ labor market choices, consumption, earnings, and asset accumulation over time. Despite the rich heterogeneity, the model is highly tractable as the optimal consumption, labor supply, capital accumulation, and migration and reallocation decisions of individual workers across different markets have closed-form expressions and can be aggregated. I study the asymmetric impact of international trade on the evolution of employment, earnings, and wealth, and decompose the frictions workers face to reallocate across U.S. sectors and regions into those with a transitory effect and those with long-lasting consequences.
Trade, skills and unemployment
draft coming soon
In theory, trade is good. In practice, considerable debate exists on whether international trade has adverse effects, particularly on the labor market. Workers in different industries and occupations are not equally affected by international trade and some workers experience important earnings losses, job displacement and protracted periods of unemployment. I develop a frictional Ricardo-Roy model of the labor market to study the effects of trade liberalizations on workers with different characteristics and skills. The model extends the search-and-matching framework to the case of ex-ante heterogeneous workers that self-select into different labor markets according to their comparative advantage and embeds it into a Ricardian model of trade. I estimate the model for the U.S. economy and analyze the effects of a large surge in international trade. Consistent with a wealth of empirical evidence, I find important effects on manufacturing employment, unemployment and earnings losses caused by a mismatch between worker’s skills and the skills demanded by firms after a trade liberalization.
International trade and labor reallocation: misclassification errors, mobility, and switching costs
International trade has increased at a rapid pace in the last decades, altering pro duction and labor demand in different sectors of the economy. The estimated effects of trade on employment and welfare critically depend on data about workers’ reallocation patterns, which is typically plagued with coding errors. I show that the estimated employment and welfare effects of international trade, and the estimated structural parameters of standard models are biased when the analysis uses data subject to missclassification errors. I develop an econometric framework to estimate misclassification probabilities, corrected mobility matrices, and structural parameters, and show that the estimated employment and welfare effects of a trade shock are different from those estimated with uncorrected data, raising an important warning about conclusions drawn from data with coding errors.
Improving Sovereign Debt Restructurings
(with Juan Sanchez, Horacio Sapriza and Emircan Yurdagul)
Journal of Economic Dynamics & Control. Vol 139 (June 2022)
The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings. The global financial crisis and the recent global pandemic have further reignited this discussion among academics and policymakers. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features of debt: maturity choice and debt renegotiation in default. We find, first, that a rule that tilts the distribution of creditor losses during restructurings toward holders of long-maturity bonds reduces short-term yield spreads, lowering the probability of a sovereign default by 25 percent. Second, issuing GDP-indexed bonds exclusively during restructurings also reduces the probability of default, especially of defaults in the ve years following a debt restructuring. The policies lead to welfare improvements and reductions in haircuts of similar magnitude when implemented separately. When jointly implemented, they reinforce each other's welfare gains, suggesting good complementarity.
Occupation Mobility, Human Capital and the Aggregate Consequences of Task-Biased Innovations
(with Alexander Monge-Naranjo)
Revision requested: Review of Economic Studies
We construct a dynamic general equilibrium model with occupation mobility, human capital accumulation and endogenous assignment of workers to tasks to quantitatively assess the aggregate impact of automation and other task-biased technological innovations. We extend recent quantitative general equilibrium Roy models to a setting with dynamic occupational choices and human capital accumulation. We provide a set of conditions for the problem of workers to be written in recursive form and provide a sharp characterization for the optimal mobility of individual workers and for the aggregate supply of skills across occupations. We craft our dynamic Roy model in a production setting where multiple tasks within occupations are assigned to workers or machines. We solve for the balanced-growth path and characterize the aggregate transitional dynamics ensuing task-biased technological innovations. In our quantitative analysis of the impact of task-biased innovations in the U.S. since 1980, we find that they account for an increased aggregate output in the order of 75% and for a much higher dispersion in earnings. If the U.S. economy had larger barriers to mobility it would have experienced less job polarization but substantially higher inequality and lower output as occupation mobility have provided a "escape" for the losers from automation.
(with Juan Sanchez, Horacio Sapriza and Emircan Yurdagul)
American Economic Journal - Macroeconomics Vol. 13, No. 2 (April, 2021)
Sovereign debt crises generally involve debt restructurings characterized by a mix of face-value haircuts and debt maturity extensions. The prevalence of maturity extensions has been hard to reconcile with economic theory. We develop a new quantitative model of endogenous sovereign debt restructuring that captures key stylized facts of sovereign debt and restructuring episodes. While debt dilution pushes in the direction of negative maturity extensions, three factors are quantitatively important in overcoming the e effects of debt dilution and generating maturity extensions: (i) income recovery after default, (ii) credit exclusion after restructuring, and (iii) regulatory costs of book-value haircuts. Methodologically, we implement dynamic discrete choice solution methods that allow for smoother decision rules, rendering the problem tractable.
News, sovereign debt maturity, and default risk
(with Juan Sanchez, Horacio Sapriza and Emircan Yurdagul)
Journal of International Economics Vol. 126, (Sep, 2020), No. 103352.
Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. In a VAR estimation, a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a bad news shock share some features of a productivity shock and others of sudden stop events. However, unlike episodes of sudden stops, long-term debt does not shield the country from bad news shocks, and it may even exacerbate default risk. Finally, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high stress in credit markets, and thus face lower yield spreads while increasing the amount of debt.
Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock
(with Lorenzo Caliendo and Fernando Parro)
Econometrica, Vol. 87, No. 3 (May, 2019), 741–835
We develop a dynamic trade model with spatially distinct labor markets facing varying exposure to international trade. The model captures the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model and take the model to the data without assuming that the economy is at a steady state and without estimating productivities, migration frictions, or trade costs, which can be difficult to identify. We calibrate the model to 22 sectors, 38 countries, and 50 U.S. states. We study how the rise in China's trade for the period 2000 to 2007 impacted U.S. households across more than a thousand U.S. labor markets distinguished by sector and state. We find that the China trade shock resulted in a reduction of about 0.55 million U.S. manufacturing jobs, about 16% of the observed decline in manufacturing employment from 2000 to 2007. The U.S. gains in the aggregate but, due to trade and migration frictions, the welfare and employment effects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.
In the media: The Economist
Sectoral Shocks, Reallocation and Unemployment in Competitive Labor Markets
Can sectoral shocks be the cause of business cycles? I investigate this question using a multisectoral business cycle model of labor reallocation and unemployment in the neoclassical tradition of Lucas and Prescott (1974)’s island model and Long and Plosser (1983)’s RBC model. In my economy, sectors are interconnected by input-output relations and by the reallocation of labor. Aggregate and sectoral productivity shocks influence the demand for labor and intermediate inputs in each sector. Workers accumulate sector-specific human capital, which makes reallocation across sectors costly and prevents rapid adjustments to shocks, thus generating unemployment. I find that an economy with both aggregate and sectoral productivity shocks is able to explain a large share of the observed volatility of output and unemployment and can match the patterns of sectoral comovement. An economy with only independent sectoral shocks cannot reproduce these facts. Moreover, impulse-response analysis shows small aggregate effects of even strong sectoral shocks. While input-output links do not propagate and amplify these shocks considerably, they are a very important source of comovement. In addition, because sectoral gross mobility is always high relative to net mobility, frictions to the reallocation of labor play a minor role in the comovement of sectoral variables.