Research

Choosing the right apple to bite: Optimal foreign currency debt denomination

The Original Sin Hypothesis states that emerging economies are restricted to issue external debt in foreign currencies. However, little attention has been given to the question: Which foreign currency should external debt be issued? In this paper, I study external debt in foreign currency by emerging economies and its link to default risk. I document empirically that as default risk increases, the share of external debt issued in the foreign currency linked to trade falls. I build a real sovereign default model where a small open economy issues debt in two different foreign currencies and faces fluctuations to the real exchange rates associated with them. Theoretically and quantitatively, the model replicates the negative relationship between spreads and the share of debt issued in the foreign currency linked to trade. Lastly, the model matches the fluctuations in share of foreign currency sovereign external debt issued in US dollars by Argentina from 2010 to 2020.

Welfare implications of retention policies (with John Bluedorn, Ippei Shibata, and Marina M. Tavares) - Slides

Retention policies—policies designed to help preserve job matches against temporary adverse shocks—dramatically rose in use during the COVID-19 crisis, but little is known about their welfare implications. This paper builds a search and matching model with an occupational choice where agents are heterogeneous in their occupational productivity. We show theoretically that the effectiveness of retention policies increases the more profound the crises are. We then calibrate the model to the United Kingdom’s experience and show that unemployment during the global financial crisis could have been half of a percentage point lower with a stronger set of retention policies. Workers’ welfare would have increased across the board, but low-skilled workers would have benefited the most.

Terms of trade and unemployment in the business cycle - [Revise and Resubmit - MD]

The standard notion regarding terms of trade is that when their movements deteriorate, small open economies are negatively affected in their real GDP. In this paper, I document that the business cycles correlation between terms of trade and real GDP varies widely between positive and negative values across countries even if separated by income groups. This raises the question, why do countries react differently towards terms of trade innovations? I show evidence that how countries react towards terms of trade movements is tightly linked to their labor market. I build a real business cycles model with a small open economy experiencing terms of trade uncertainty and real wage rigidity. I find that real wage rigidity is not only able to account for a negative correlation between terms of trade and real GDP innovations, but also a positive one.

​Sovereign spread movements in emerging economics: Terms of trade matter (with Sora Lee)

We propose a stochastic general equilibrium model of sovereign default with endogenous default risk in order to explain the interest rate behavior in emerging economies. We incorporate two types of shocks to cover foreign and domestic uncertainty. We define the domestic and the foreign uncertainty, GDP, and terms of trade shock, respectively. The model is able to successfully increase the dispersion of sovereign interest rates when GDP shocks are above the trend. This result seems to suggest that terms of trade are a good candidate to explain the volatility of interest rates in small open economies when they are not under recessions or crises.

Automation, education, and labor income inequality (with Andrea Pescatori) - Slides

The US has experienced a steep increase in labor income inequality in the last decades. Among many reasons for this, automation is known to be the main driver by increasing the wage gap between high-skill and low-skill workers. In addition to this, college education costs have also soared in the last decades, making it difficult to become a high-skill worker. We propose an endogenous skill choice life-cycle model to study how automation and the increase in higher education costs affect labor income inequality. We find that higher education costs amplify labor income inequality induced by automation. We then conduct a counterfactual experiment where we fix college education costs. We find that labor income inequality would have increased by just a third of what data shows in the US.

Monetary independence and rollover crises (with Javier Bianchi) - [The Region Summary]

Quarterly Journal of Economics, February 2022

This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. In a quantitative application to the Eurozone debt crisis, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.

Recessions and Recoveries in Labor Markets: Patterns, Policies, and Responses to the COVID-19 Shock (with John Bluedorn, Francesca Caselli, Wenjie Chen, Niels-Jakob Hansen, Ippei Shibata, and Marina M. Tavares) - [IMFBlog Summary][Chart of the Week]

World Economic Outlook, April 2021 (Chapter 3)

The labor market fallout from the COVID-19 pandemic shock continues, with young and lower-skilled workers particularly hard-hit. Preexisting employment trends favoring a shift away from jobs that are more vulnerable to automation are accelerating. Policy support for job retention is extremely powerful at reducing scarring and mitigating the unequal impacts from the acute pandemic shock. As the pandemic subsides and the recovery normalizes, a switch toward worker reallocation support measures could help reduce unemployment more quickly and ease the adjustment to the permanent effects of the COVID-19 shock on the labor market.