Research

Working Papers

Monetary Policy During Unbalanced Global Recoveries (with Luca Fornaro) (R&R at American Economic Review)

We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully born domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goods driven recoveries.

Why Does Capital Flow from Equal to Unequal Countries? (with Sergio de Ferra and Kurt Mitman)

Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows

"Sovereign Default in a Monetary Union" (with Sergio de Ferra)

In the aftermath of the global financial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.

"Need for (the Right) Speed: The Timing and Composition of Public Debt Deleveraging"  

This paper studies what is the optimal path for public debt deleveraging in a heterogeneous agents framework under incomplete financial markets. My analysis addresses two questions: What is the optimal fiscal instrument the government needs to use to reduce public debt? What is the optimal speed of public debt deleveraging? It is optimal to reduce public debt in a fast way by cutting public expenditure. If the fiscal authority is forced to use income taxation, public debt deleveraging needs instead to be slow. Independently of fiscal instruments, the economy may end up in a liquidity trap. I show that, in my model, the zero lower bound has a redistributive effect. If the liquidity trap is very persistent, it can reallocate resources from financially constrained agents to financially unconstrained ones. Due to this mechanism, a very slow public debt reduction achieved by increasing income taxation is very costly in terms of aggregate welfare. 

Published Papers

"Household Heterogeneity and the Transmission of Foreign Shocks" (with Sergio de Ferra and Kurt Mitman), Journal of International Economics, Vol. 124, May 2020.

We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations.

"Dynamic Debt Deleveraging and Optimal Monetary Policy", (with Pierpaolo Benigno and Gauti Eggertsson), American Economic Journal: Macroeconomics, Vol. 12, No 2, 310-50, April 2020.

This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.

"The Paradox of Global Thrift" (with Luca Fornaro), American Economic Review, Vol.109, No 11, 3745-3779, November 2019.

This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Global output and welfare may then fall following the implementation of prudential policies.

"Debt Deleveraging and the Exchange Rate", (with Pierpaolo Benigno), Journal of International Economics, Vol. 93, pp. 1-16,(2014). Technical Appendix. 

Deleveraging from high debt can provoke deep recession with significant international side effects. Swings in the nominal exchange rate and large variations in consumption, output, and terms of trade can happen during the adjustment. All these movements are inefficient and interesting trade-offs emerge from the perspective of global welfare. The optimal adjustment to global imbalances should not necessarily require large movements in the nominal exchange rate. A global liquidity trap can be desirable when countries are more open to trade.