Research

The Political Economy of Currency Unions, slides Revise and Resubmit at the Journal of International Economics 

Abstract: How can monetary and fiscal policy sustain a currency union when member states have an exit option? This paper derives an interest rate rule that features state-dependent country weights with which the central bank can prevent a break-up. A simulation reveals that this policy rule lacks firepower and can only extend the lifetime of the union for a while. While monetary policy is more potent in unions with more member states or setups with local currency pricing, it is still true that even a simple fiscal union with lump-sum transfers is better suited to prevent a break-up. Environments with lower risk sharing, the ZLB or wage rigidity make monetary policy even less effective.

Consumption Inequality in the Digital Age, slides (with Katja Mann)  

Abstract:  This paper studies how digitalization affects consumption inequality. While previous literature has documented that technological change leads to U-shaped income polarization, we show that this pattern does not translate into consumption or welfare. This is due to price changes that are more beneficial for richer households. By assembling a novel dataset of digital technology in consumption, we establish several new stylized facts: First, high-income households consume a larger share of digitally produced products. Second, consumption items that rely more on digital inputs witness lower price inflation. Third, high-income households spend a larger share of their time on digital-intensive activities. Building on these findings, we present a structural model that quantifies the impact of digitalization on consumption inequality. The model weighs U-shaped income polarization against inflation rates that decrease with income. As a result, the welfare response to digitalization is J-shaped.

Gains from Commitment: The Case for Pegging the Exchange Rate, slides (with Ricardo Duque Gabriel)

Abstract: Does the exchange rate regime matter for inflation and economic activity? This paper argues that it does and that there are substantial benefits to a fixed exchange rate regime. At the heart of these benefits lies an increase in commitment for the central bank that reduces the inflationary bias of monetary policy. Using an open economy model we provide an estimate for the credibility of hundred different central banks between 1950 and 2016. Our empirical analysis demonstrates that after pegging the currency to a more credible anchor, the average economy benefits from persistently lower inflation of 3.5% per year, higher temporary economic growth and lower inflation volatility. Moreover, the less credible countries are the ones benefiting the most from committing to a fixed exchange rate regime. 

Privilege Lost? The Rise and Fall of a Dominant Global Currency slides  (with Nuno Coimbra), 

 How does a country obtain the status of a safe haven with a dominant global currency? This paper argues that size matters: as a country becomes larger and more diversified, the underlying shock process of the economy becomes less variable. Shocks that can drive a government to default become less likely, implying lower default probability, lower interest rates and a larger debt capacity. Furthermore, the larger a country’s share in the supply of global safe assets, the more liquid and attractive its bonds are for investors. If the dominant currency country grows less than the rest of the world, its status as a safe haven erodes and interest rate differentials decline. We also discuss how the structure of shocks, a country‘s institutional features and financial development matter for its role as a global currency.