Publications
Is a Fiscal Union Optimal for a Monetary Union? (joint with R. Berriel, P.J. Kehoe, and E. Pastorino) [Paper] [Online Appendix] [Replication Package]
Journal of Monetary Economics (January 2024)
When is a fiscal union appropriate for a monetary union? In a monetary union without fiscal externalities, when local fiscal authorities have an informational advantage over a central fiscal authority in terms of their knowledge of countries' preferences for government spending, a decentralized fiscal regime dominates a centralized one. Our novel result is that in the presence of fiscal externalities across countries, however, a decentralized fiscal regime is optimal for small monetary unions, whereas a centralized fiscal regime is optimal for large ones. These results shed new light on the debate on fiscal integration within the EU and its enlargement.
Working Papers
Interest Rate Shocks and the Composition of Sovereign Debt [Draft] [TSE Working paper]
There has been a growing concern about the vulnerability of emerging countries to fluctuations in international interest rates. Empirical evidence shows these countries suffer significant output drops when developed countries raise their interest rates. In this paper, I document that an important determinant of the magnitude of this effect is the ability of countries to issue sovereign debt domestically, rather than to external creditors. Moreover, I find that the level of financial development of domestic markets is positively related to the share of total public debt that is domestically held. I build a model that integrates a domestic banking sector into a sovereign default model where governments can issue domestic and external debt and decide whether to default on debt selectively. Due to financial frictions, issuing domestic debt crowds out capital investment. As financial markets develop, i) crowding-out costs decrease, and ii) banks demand lower interest rates on domestic bonds. Both effects reduce the relative cost to the government of borrowing domestically, leading to a higher share of domestic debt. I calibrate the model and show that the results are consistent with the pattern of discriminatory default in developing countries. Then, I use the model to decompose the effect of external and domestic shocks on output volatility and find that financial development decreases the susceptibility of emerging economies to external shocks.
Dual Labor Markets and Career Mobility (joint with Chris Busch, Ismael Gálvez-Iniesta, and Ludo Visschers) [New draft coming soon]
We study how a dual labor market, with time-limited fixed-term and protected open-ended contracts, affects the occupational careers of workers. Attachment to occupations is affected by the cost/benefit of remaining in the occupation (which depends on the contract type the worker has or will have in the future), vs. starting in a new occupation (where it matters which contract types are available when starting afresh). We evaluate the forces that shape the careers of workers quantitatively, in a dynamic equilibrium model of the labor market. Finally, we study the impact of policy changes to address duality.
Labor Mobility Over the Business Cycle [New draft coming soon]
This paper studies the macroeconomic effects of internal migration in an economy with labor market frictions and quantifies its role in mitigating asymmetric shocks. Labor mobility is viewed as a key mechanism to stabilize the economy from regional shocks in currency unions. However, this view does not take into account the equilibrium effects of worker mobility in the presence of search frictions. First, I gather new evidence connecting individual migration decisions to aggregate economic outcomes over the business cycle. I show that during the Great Recession in the United States labor flows across states strongly responded to changes in economic conditions. Moreover, I find that in economic expansions job-to-job transitions account for most of the interstate movements, whereas during downturns there is a significant increase in the relocation of unemployed workers across states. Then, I develop an equilibrium model with fluctuations in aggregate productivity in which search frictions are crucial to generating the observed patterns in the data, and in particular, to explain the procyclicality of migration. I calibrate the model to the U.S. economy during the Great Recession and study the implications of labor mobility on local and aggregate labor markets.
Fiscal Federalism and Monetary Unions (joint with Rafael Berriel, Patrick J. Kehoe, and Elena Pastorino) [NBER Working Paper] [Slides]
We apply ideas from fiscal federalism to derive new results on how fiscal authority should be delegated within a monetary union. We consider a monetary-economy model, in which governments finance their expenditures with nominal debt and inflation has a negative effect on productivity. If the monetary authority has commitment, then a version of Oates's (1999) decentralization result holds. By contrast, when the monetary authority lacks commitment, the resulting time-inconsistency problem generates an indirect endogenous fiscal externality. In this case, when a country-level fiscal authority chooses a higher level of nominal debt, it induces the monetary authority to inflate more. Since the country-level fiscal authority does not take into account this adverse indirect effect of its actions on inflation, a negative fiscal externality arises, which becomes more severe as the number of countries in the monetary union increases. Hence, a decentralized regime is optimal for small monetary unions, whereas a fiscal union is optimal for sufficiently large ones. Our key new result is that as the size of a monetary union increases, it becomes relatively more desirable to centralize fiscal authority.
Product Friction Heterogeneity and the Business Cycle (joint with Sergio Salgado) [Draft]
In the United States, 8% of the GDP is devoted to marketing and selling expenditures, and more than 2% in advertising. We interpret this as evidence of frictions in the product market: firms must spend a significant amount of resources in order to attract consumers to buy their products. Using firm-level data, we provide evidence of the relation between the degree of product frictions, firm growth rate, and the responsiveness of firms to aggregate economic conditions. We find that firms facing higher frictions in the product market, measured by selling expenditures-to-sales ratio, grow less and suffer significantly more during recessions. Moreover, we find that small, recently created firms face higher product frictions than large already established firms, which partially explains why these young firms suffer more during economic downturns. Motivated by this evidence, we develop a model of search in the product market in which firms need to spend resources to find consumers. Preliminary results show that the presence of product frictions can account for the different responses of young and old firms to aggregate shocks.