Economist, European Department, 
International Monetary Fund

1900 Pennsylvania Ave NW, Washington, DC, 20431

E-mail: aari [at]

(Last updated: April 2019)

Interests: Macroeconomics, International Finance, Banking

Disclaimer: This is my personal website. The views expressed here do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Working Papers

Previously circulated as Sovereign Risk and Bank Risk-Taking 

Abstract: I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth and lead to a "gambling trap" with a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in default-risky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may perpetuate gambling traps when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.

Awards: 2015 Klaus Liebscher Award, UniCredit & Universities Money, Banking and Finance Best Paper Award, Best Article in International Macro Award at RIEF Florence 2016, Cambridge Finance Best Student Paper Award, ECB Lamfalussy Fellowship, shortlisted for the Young Economist Award at the Third ECB Forum on Central Banking (Sintra) and the Ieke van den Burg Prize

Media coverage: APA-OTS

with Christoffer Kok, Matthieu Darracq Pariès and Dawid Żochowski

Abstract: We present a model in which shadow banking arises endogenously and undermines market discipline on traditional banks. Demandable deposits impose market discipline: Without shadow banking, traditional banks optimally pursue a safe portfolio strategy to prevent early withdrawals. Shadow banking constitutes an alternative banking strategy that combines high risk-taking with early liquidation in times of crisis. In equilibrium, shadow banks expand until their liquidation causes a fire-sale and exposes traditional banks to liquidity risk. Higher deposit rates in compensation for liquidity risk deter early withdrawals, undermining market discipline on traditional banks. Constrained-optimal policy interventions deter entry into shadow banking.
Media coverage: cited in the ECB Vice-President's speech

Debt Seniority and Sovereign Debt Crises, with Giancarlo Corsetti and Luca Dedola
Abstract: Is the seniority structure of sovereign debt neutral for a government's decision between defaulting and raising surpluses? In this paper, we address this question using a model of debt crises where a discretionary government endogenously chooses distortionary taxation and whether to apply an optimal haircut to bondholders. We show that when the size of senior tranches is small, a version of the Modigliani-Miller theorem holds: tranching just redistributes government revenues from junior to senior bondholders, while taxes and government borrowing costs remain unchanged. However, as senior tranches become sufficiently large, default costs on senior debt transpire into a stronger commitment to repay not only the senior tranche, but also the junior one. We show that there is a lower threshold for senior bonds above which tranching can eliminate default on both junior and senior debt, and an upper threshold beyond which the government defaults also on senior debt.

Work in Progress

Designing Central Bank Digital Currencies,
with Itai Agur and Giovanni Dell'Ariccia

Foreign Political Risk and Local House Prices: Evidence from the US,
with Damien Puy and Yu Shi

The Dynamics of Non-Performing Loans during Banking Crises,
with Sophia Chen and Lev Ratnovski

Monetary Policy and Sovereign Debt Crises in a Currency Area, 
with Giancarlo Corsetti, Luca Dedola and Galip Kemal Ozhan

Policy Papers

Casting Light on Central Bank Digital Currencies, IMF Staff Discussion Note No. 18/08, November 2018

with Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria, Itai Agur, John Kiff, Celine Rochon and Adina Popescu

Abstract: Digitalization is reshaping economic activity, shrinking the role of cash, and spurring new digital forms of money. Central banks have been pondering whether and how to adapt. One possibility is central bank digital currency (CBDC)-- a widely accessible digital form of fiat money that could be legal tender. This discussion note proposes a conceptual framework to assess the case for CBDC adoption from the perspective of users and central banks. It discusses possible CBDC designs, and explores potential benefits and costs, with a focus on the impact on monetary policy, financial stability, and integrity. This note also surveys research and pilot studies on CBDC by central banks around the world.

Short pieces and other work

A world with central bank digital currencies, short piece in, February 2019

with Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria, Itai Agur, John Kiff, Celine Rochon, Adina Popescu and Zoltan Jakab

Housing Strikes Back: Remaining Attuned to Risks, in IMF Research Perspectives, Vol. 19, No. 2, December 2018

Lessons from Cyprus that did not make it to Greece
short piece in, August 2015

with Giancarlo Corsetti and Andria Lysiotou

Abstract: Cyprus has been striving to get back on its feet after a painful bailout in 2013. This column examines the lessons that could have been drawn from the Cypriot experience by Greece in its recent attempt to seal a bailout deal. Specifically, lengthy negotiations – while tending to mitigate the risk of contagion – offer little benefit for debtor countries, and capital controls, once implemented, cannot be easily undone. While they come too late for Greece, these lessons can be important for countries in need of financial assistance in the future.

Media coverage: World Economic Forum,
Ὁ Φιλελεύθερος  (in Greek)