This page highlights some of my most important research papers. It's an entirely subjective list.
The term structure of interest rates in a heterogeneous monetary union, with Galo Nuño (Banco de España) and Carlos Thomas (Banco de España). Forthcoming August 2025, Journal of Finance 80(4).
Journal of Finance (Early view), May 2025.
Author's final version, including online appendices, August 2024.
Replication programs , September 2024.
BIS WP1165, February 2024.
Banco de España WP2223, June 2022.
Seminar slides, May 2023.
We build a no-arbitrage model to analyze the term structure of sovereign interest rates in a two-country monetary union where "core" bonds are safe but "peripheral" bonds are defaultable. The possibility of rollover crises in the peripheral bond market implies a default probability that depends on bond supply net of central bank holdings. We identify conditions under which the bond price solution is affine, in spite of the presence of a time-varying risk of partial default, and we decompose yields into term premium and credit risk components.
We calibrate the model to Germany and Italy to analyze the impact of the ECB's pandemic emergency purchase program (PEPP). The model replicates the asymmetric reaction of the two yield curves to the PEPP announcement on March 18, 2020, including the roughly parallel downward shift in Italian yields. Most of the latter shift is due to the credit risk components, and in particular to the pricing of default risk, which is strongly affected both by the expected absorption of peripheral bonds by the PEPP and by an endogenous decrease in the probability of default. The flexibility of the PEPP framework is found to have enhanced its impact on aggregate euro-area yields.
Fiscal delegation in a monetary union: Instrument assignment and stabilization properties, with Henrique S. Basso (Banco de España).
Bank of Spain Working Paper 1710, March 2017.
Seminar slides, June 2017.
Motivated by the failure of fiscal rules to eliminate deficit bias in Europe, this paper analyzes an alternative policy regime in which each member state government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation. We study the short- and long-run properties of dynamic games representing different institutional configurations in a monetary union. Delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable "austerity" when it responds to fiscal shocks.
Smoothing shocks and balancing budgets in a currency union, with Beatriz de Blas (Univ. Autónoma de Madrid).
Moneda y Crédito 234, pp. 37-91, September 2012.
We study simple fiscal rules for stabilizing the government debt in response to asymmetric demand shocks for a member state of a currency union. We compare debt stabilization through tax rate adjustments with debt stabilization through expenditure changes. We discuss a mechanism that might make rapid and flexible adjustment of public expenditure feasible: setting salaries of public employees, and social transfers, in an alternative unit of account, and delegating the valuation of this numeraire to an independent fiscal authority.
Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the cyclical implications of several fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption and employment, thus bringing the market economy closer to the social planner's solution.
Logit price dynamics, with Anton Nakov (ECB).
Journal of Money, Credit and Banking 51 (1), pp. 43-78, January 2019.
Author's final version (including computational appendix), July 2018.
CEPR Discussion Paper 10731, July 2015.
Seminar slides, October 2014.
Programs, May 2015.
We model retail price stickiness as the result of costly, error-prone decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro facts related to the size of price changes, the behavior of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the "selection effect". Allowing for both types of errors also helps explain how trend inflation affects price adjustment.
Distributional dynamics under smoothly state-dependent pricing, with Anton Nakov (ECB).
Journal of Monetary Economics 58 (6-8), pp. 646-665, Sept.-Nov. 2011.
Programs, August 2011.
Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into "intensive", "extensive", and "selection" margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate.
Flattening of the Phillips curve under state-dependent prices and wages, with Anton Nakov (ECB) and Borja Petit-Zarzalejos (CUNEF).
Economic Journal 132(642), pp. 546-581. February 2022.
ECB Working Paper 2272, April 2019.
Seminar slides, November 2018.
We study monetary transmission in a model of state-dependent prices and wages based on "control costs". Stickiness arises because precise choice is costly: decision-makers tolerate errors both in the timing of adjustments, and in the new level at which the price or wage is set. The model is calibrated to microdata on the size and frequency of price and wage changes. In our simulations, money shocks have less persistent real effects than in the Calvo framework; nonetheless, the model exhibits a substantial degree of non-neutrality, driven mainly by wage rigidity. State-dependent nominal stickiness implies a flatter Phillips curve as trend inflation declines, because price and wage adjustments become less frequent, making short-run inflation less reactive to shocks. Our model can explain almost half of the observed decline in the slope of the Phillips Curve since 2000.
Costly decisions and sequential bargaining.
Bank of Spain Working Paper 1729, August 2017.
Seminar slides, July 2017.
Programs, July 2017.
This paper models a near-rational agent who chooses from a set of feasible alternatives, subject to a cost function for precise decision-making. Costs are defined in units of time; hence by choosing more slowly, the decision-maker can achieve greater accuracy. Moreover, the timing of the choice is also treated as a costly decision.
This model of time-consuming decisions is applied to a sequential bargaining game. Unlike the game of Perry and Reny (1993), in which the decision time is an exogenous fixed cost, here the decision-maker can vary precision by choosing more or less quickly, thus endogenizing the order and timing of offers and responses in the game. Numerical simulations of bargaining equilibria resemble those of the Binmore, Rubinstein, and Wolinsky (1983) framework, except that the time to reach agreement is nonzero and offers are sometimes rejected. In contrast to Perry and Reny (1993), our numerical results indicate that equilibrium is unique if the set of possible offers is sufficiently finely spaced.
Employment fluctuations in a dual labor market, with Juan Francisco Jimeno and Carlos Thomas.
Bank of Spain Working Paper 1013, April 2010.
Replication programs, 2011: simulprograms.zip, simul_unified.zip, README_CJT.pdf
In a model of endogenous job creation and destruction, we show that in a labor market in which "temporary" employment contracts with limited duration and low firing costs coexist with "permanent" employment contracts with high firing costs, (un)employment is more volatile than in an otherwise-identical economy with a single contract type. In this environment, employment grows gradually in booms, due to matching frictions, whereas the onset of a recession causes a burst of firing of "fragile" low-productivity jobs. Unlike permanent jobs, some newly-created temporary jobs are already near the firing margin, which makes temporary jobs more likely to be fragile and means they play a disproportionate role in employment fluctuations. Unifying the labor market makes all jobs behave more like the permanent component of the dual economy, and therefore decreases volatility. Finally, we confirm that factors like unemployment benefits and wage rigidity also have a large, interacting effect on labor market volatility; in particular, higher unemployment benefits increase the impact of duality on volatility.
Employment fluctuations with downward wage rigidity, with Marcel Jansen (Univ. Autónoma de Madrid).
Scandinavian Journal of Economics 112, pp. 782-811, December 2010.
We study the cyclical dynamics of job creation and destruction when workers' effort is not perfectly observable. The no-shirking constraint may amplify fluctuations in hiring by making firms' surplus share procyclical, and may cause a burst of inefficient firing when a downturn begins. But quantitatively, it mainly raises the cost of motivating marginal workers in booms, since firms cannot commit to keep them in recessions, and thereby strongly damps the countercyclical fluctuations in the separation rate. This implies a robust Beveridge curve, but casts doubt on Ramey and Watson's (1997) "contractual fragility" mechanism and worsens Shimer's (2005) "volatility puzzle".
Business cycles, unemployment insurance, and the calibration of matching models, with Michael Reiter (Institute for Advanced Studies, Vienna).
Journal of Economic Dynamics and Control 32, pp. 1120-1155, April 2008.
This paper documents a puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, either sticky wages or match-specific productivity shocks can improve the model's performance by making the firm's flow of surplus more procyclical, which makes hiring more procyclical too.
Stabilization versus insurance: welfare effects of procyclical taxation under incomplete markets, with Michael Reiter (Institute for Advanced Studies, Vienna).
Univ. Pompeu Fabra Economics Working Paper 890, May 2005.
We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the costs of business cycles and locate the optimum in a set of simple cyclical fiscal policies.
Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, by increasing the unconditional probability of unusually long unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers' aggregate consumption, and most of the welfare cost of business cycles.
Unemployment insurance with endogenous search intensity and precautionary saving.
Univ. Pompeu Fabra Economics Working Paper 243, November 1997.
A welfare analysis of unemployment insurance (UI) is performed in a general equilibrium job search model. Finitely-lived, risk-averse workers smooth consumption over time, choose search effort, and suffer disutility from work. Firms hire workers, purchase capital, and pay taxes to finance UI; their equity is the asset accumulated by workers. A matching function relates unemployment, hiring expenditure, and search effort to job formation. The model is calibrated to US data; the parameters relating search effort to the probability of job finding are chosen to match microeconomic studies of unemployment spells.
Under logarithmic utility, numerical simulation shows rather small welfare gains from UI. Even without UI, workers smooth consumption effectively through asset accumulation. Greater risk aversion implies substantially larger gains from UI; but even in this case, its welfare impact relates less to consumption smoothing effects than to decreased work disutility, and to a variety of externalities.
Multiple outcomes of speculative behavior in theory and in the laboratory, with Frank Heinemann and Peter Ockenfels.
Manuscript, June 2007.
This paper challenges Morris and Shin's (1998) argument that the outcome of a speculative attack is uniquely determined by macroeconomic fundamentals. We generalize Morris and Shin's model, and the experiment of Heinemann, Nagel, and Ockenfels (2004), by making decisions sequential and allowing some previous actions to be observed. We show sufficient conditions that guarantee the existence of a range of fundamentals where multiple outcomes occur. The main requirement is simply that most players must observe a sufficiently large number of previous choices.
In our experimental sessions, eight to twelve players observe signals about the aggregate state, and may also observe a random subset of previous actions. Our subjects display herding behavior consistent with the unique logit equilibrium of a boundedly rational version of our game. These strategies imply a unique mapping between fundamentals and the fraction of players attacking if previous actions are unobserved. But when most previous actions are observed, they give rise to a "tripartite classification of fundamentals": there is a significant middle interval in which all players attacking, and no players attacking, both occur with more than 1% probability.
A herding perspective on global games and multiplicity.
B.E. Journal of Theoretical Economics 7 (1), Article 22, June 2007.
Recently, it has been claimed that full-information multiple equilibria in games with strategic complementarities are not robust, because generalizing to allow slightly heterogeneous information implies uniqueness. This paper argues that this "global games" uniqueness result is itself not robust. If we generalize by allowing most agents to observe just a few previous actions before choosing, instead of forcing players to move exactly simultaneously, then multiplicity of outcomes is restored. Only a small sample of observations is needed to make our herding equilibrium behave like a full-information sunspot equilibrium instead of a global games equilibrium.
A simple model of multiple equilibria based on risk.
Univ. Pompeu Fabra Economics Working Paper 407, July 1999.
This paper shows how risk may aggravate fluctuations in economies with imperfect insurance and multiple assets. A two period job matching model is studied, in which risk averse agents act both as workers and as entrepreneurs. They choose between two types of investment: one type is riskless, while the other is a risky activity that creates jobs.
Equilibrium is unique under full insurance. If investment is fully insured but unemployment risk is uninsured, then precautionary saving behavior dampens output fluctuations. However, if both investment and employment are uninsured, then an increase in unemployment gives agents an incentive to shift investment away from the risky asset, further increasing unemployment. This positive feedback may lead to multiple Pareto-ranked equilibria. An overlapping generations version of the model may exhibit poverty traps or persistent multiplicity. Greater insurance is doubly beneficial in this context since it can both prevent multiplicity and promote risky investment.