Research
Working papers/ Work in progress
Sovereign debt repatriation during crises, with Serkan Arslanalp, 2022
We use a new, comprehensive data set on the sovereign debt investor base to document four novel empirical facts: (i) sovereign debt is repatriated - that is, shifted from external private to domestic investors - prior to sovereign defaults; (ii) not all crises are equal: evidence for repatriation during banking and currency crises is more limited; (iii) the nature of defaults matters: external investors do not leave during preemptive debt restructurings; and (iv) market size and absence of capital controls play a role: repatriation is prevalent during defaults in large markets with low capital controls. The data set we use is uniquely suited to analyzing investor base dynamics during rare crises due to its large cross-section and time series, covering 180 countries from 1989 to 2020.
The transmission of foreign demand shocks, with Jeppe Druedahl, Søren Hove Ravn, Jacob Marott Sundram and Nicolai Waldstrøm, 2022
Introducing heterogeneous households into a New Keynesian model of a small open economy enables the model to fit a set of stylized empirical facts about the transmission of foreign demand shocks. In the absence of a strong labor income effect on consumption, the model counterfactually implies that domestic consumption decreases as the central bank raises the interest rate to curb domestic inflation. With plausible marginal propensities to consume, the model instead produces the observed increase in domestic consumption of both tradeable and non-tradeable goods. This implies that foreign demand shocks are more important for international business-cycle comovement than predicted by existing models. Our findings also have implications for stabilization policies: While monetary policy is well-suited to counteract foreign demand shocks, traditional fiscal policies are inadequate, as they do not provide sufficient stimulus to the tradeable sector. This poses a particular challenge for countries with a fixed exchange rate or in a monetary union.
Inferring income risk from house purchase decisions, with Rocio Madera
Publications
Non-linear effects of government spending shocks in the U.S.: Evidence from state-level data, with Haroon Mumtaz, Journal of Applied Econometrics, 2020
Paper, Online Appendix, Published version
This paper uses state-level data to estimate the effect of government spending shocks during expansions and recessions. By employing a mixed-frequency framework, we are able to include a long span of annual state-level government spending data in our non-linear quarterly panel VAR model. We find evidence that for the average state the fiscal multiplier is larger during recessions. However, there is substantial heterogeneity across the cross-section. The degree of non-linearity in the effect of spending shocks is larger in states that are subject to a higher degree of financial frictions. In contrast states with a prevalence of manufacturing, mining and agricultural industries tend to have multipliers that are more similar across business cycle phases.
Inflation, default, and sovereign debt: The role of denomination and ownership, Journal of International Economics, 2020
Paper, Online Appendix, Published version
Emerging market governments hold mixed debt portfolios: They borrow at home and abroad in both nominal and real terms. This paper incorporates such a mixed debt structure into a theory of sovereign debt, default and inflation. The government optimally uses both default and inflation to balance its budget. The portfolio structure affects the relative benefits of inflation, default and incentives to accumulate debt. A calibrated version of the model can account for key features of the Mexican economy. We use the model to study if portfolio shifts away from purely real and external debt contributed to emerging market disinflation in the mid 1990s. We find that the answer depends on the distinction between ownership and denomination: Increasingly nominal debt is inflationary if held abroad, but lowers inflation if held at home.
The state-level impact of uncertainty shocks, with Haroon Mumtaz and Angeliki Theophilopoulou, Journal of Money, Credit and Banking, 2018
Paper, Online Appendix, Published version
This paper uses a FAVAR model with stochastic volatility to estimate the impact of uncertainty shocks on real income growth in US states. The results suggest that there is a large degree of heterogeneity in the magnitude and the persistence of the response to uncertainty shocks across states. The response is largest in Michigan, Indiana and Arkansas while the real income in New York, Alaska and New Mexico seems least sensitive to uncertainty. We relate the cross section of responses to state-level characteristics and find that the magnitude of the decline in income is largest in states with a large share of manufacturing, agriculture and construction industries, a high fiscal deficit and a more volatile housing market. In contrast, a higher share of mining industries and larger inter-governmental fiscal transfers ameliorate the impact of uncertainty.
Writing off sovereign debt: Default and recovery rates over the cycle, Journal of International Money and Finance, 2018
Paper, Online Appendix, Published version
This paper studies the joint determination of sovereign borrowing, default and debt restructuring outcomes. In the data, low debt recovery rates are associated with deep recessions in defaulting countries, high indebtedness at the time of default, and high borrowing costs post-default. I develop a dynamic model of sovereign debt to account for these facts. Recovery rates in the model are determined as the result of two countervailing forces: Cyclical conditions which reduce recovery rates in recessions, and procyclical borrowing which has the opposite effect. The former needs to be sufficiently strong for the model to match the data, and I present empirical evidence and a theoretical rationale for such excess sensitivity of restructuring outcomes to cyclical conditions in the form of countercyclical bargaining power of the sovereign. In the calibrated model, I show that accounting for the cyclicality of recoveries is important for correctly predicting the timing of default events. Procyclical and low recovery rates are detrimental for welfare, but the gains from eliminating the cyclicality are more than twice as high as those from raising average recovery rates.
Time-varying dynamics of the real exchange rate: An empirical analysis, with Haroon Mumtaz, Journal of Applied Econometrics, 2013
We use a time-varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co-movement of the real exchange rate and fundamentals. Simulations from an open-economy DSGE model show that these results are consistent with a decline in exchange rate pass-through.