Work in Progress:

External Saving and Exhaustible Resource Extraction

This paper examines the optimal saving and extraction policy of an exhaustible resource-rich economy (ERRE) in a model with endogenous risk. The recent surge in current account surpluses held by several ERREs, and the even more recent downturn in commodity prices, begs the follows questions: 1) what are the main determinants of the demand for net foreign assets from ERREs; 2) and how does the precautionary motive to increase external savings interact with the rate of depleting the exhaustible resource? To answer these questions, the paper provides a characterization of endogenous risk in such an economy and points to the key factors which govern the trade-o. between keeping the resource underground and increasing external savings. I proceed to quantify the extent to which savings and the extraction rate respond to changes in uncertainty, prudence, impatience, the cost of extraction, and demographic growth. The quantitative assessment yields the following results: a) precautionary motive to save is stronger when the extraction decision in a model with endogenous risk; b) the extraction rate depends on savings and increases more rapidly at higher levels of external savings; c) increased prudence and uncertainty accelerate the depletion of the exhaustible resource; i.e. the in situ resource is a risky asset; d) the model does well in capturing the dynamics of net foreign assets and extraction path for the sample of countries over the last four decades.

The Delaying Effect of Storage on Investment: Evidence from the Crude Oil Sector (joint with Nicolas Legrand)

Our paper provides a theoretical framework able to represent with accuracy a consistent relationship between fixed capital investment, storage and prices in a storable commodity market. It sets out to understand the interaction of storage capacity with irreversible investment decisions in mediating investment and commodity price dynamics. The results show that the presence of storage delays capital investment, reduces future production capacity, thus creating greater future uncertainty over the market’s ability to respond to shocks, and eventually rendering future prices more volatile. The time-varying expected price volatility related to the inventory levels is a new channel we identify to show why irreversible investment decisions in a storable commodity market capture more accurately both price and investment dynamics observed in the data as compared to an irreversible investment setting with no storage capacity.

Share Buybacks, Monetary Policy and the Cost of Debt. (joint with Riccardo Zago)

Share buyback programs crowd out investment and employment. This paper is the first in the literature to show that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt due to innovations in monetary policy is key in explaining managers incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of loose monetary policy, when the yield on bond adjusts in the same direction. This behavior has macroeconomic implications as it exacerbates the crowding out effect on investment and employment, thus reducing the effectiveness of monetary policy.