Terms of trade and unemployment in the business cycle (job market paper) - Draft coming soon
In the data, some countries share a deep negative relationship between terms of trade and real GDP. Nevertheless, I document that a significant amount of other countries share a positive relationship. This raises the question of why terms of trade shocks affect countries differently. Furthermore, there is a disconnect with standard models because they are unable to rationalize both reactions to terms of trade shocks. In this paper, I study how terms of trade shocks affect macroeconomic aggregates in a small open economy with real wage rigidities. Specifically, I propose that the nature of how terms of trade shocks have affect differently macroeconomic aggregates is due to fritions in the labor market.
Monetary independence and rollover crises (with Javier Bianchi) - Draft
This paper shows that the lack of monetary autonomy makes an economy more vulnerable to a rollover crisis. We study a model of endogenous sovereign default with self-fulfilling rollover crises, foreign currency debt and downward nominal wage rigidity. When the government lacks monetary autonomy, the economy becomes fragile to a panic in sovereign debt markets. Investors anticipate that the government will find the debt too costly to repay in the event of a panic, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy, can stabilize the economy and remains almost immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone fragile to a rollover crisis.
Automation, education, and labor income inequality (with Andrea Pescatori) - Draft Coming Soon - 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 a 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.
Sovereign spread movements in emerging economics: terms of trade matter (with Sora Lee) - Draft
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 a foreign and a domestic uncertainty. We define as the domestic and the foreign uncertainty, GDP and terms of trade shock, respectively. The model is able to successful increase the dispersion of sovereign interest rates when GDP shocks are above the trend. This result seems to suggest that terms of trade is a good candidate to explain the volatility of interest rates in small open economies when they are not under recessions or crises.