Research
PUBLISHED PAPERS
A Theory of International Unions with Exits
Journal of Economic Theory vol. 215, (2024)
This paper analyzes the possibility of a country exiting an international union. It studies two possible policies aimed at preventing inefficient exits: fiscal transfers within the union and the introduction of exit costs. It shows that the deadweight loss exit costs can be Pareto-optimal, but might face a lack of credibility. The credibility issue can be eliminated when the union faces the exit problem repeatedly, i.e., if different countries are at risk of exiting over time. The paper sheds light on a possible post-exit relationship between the union and the exiting country. It also shows how the cooperation is limited if the deal serves as a precedent for the other countries.
Bailout Dynamics in a Monetary Union
Journal of International Economics vol. 142, (2023)
This paper analyzes country bailouts in a monetary union within a framework where sovereign default and exit from the union are two separate decisions. The studied bailouts are meant to prevent an exit and, thus, do not exclude subsequent defaults. The model replicates the experience of Greece, which received multiple rounds of implicit fiscal transfers, which exceeded 40% of its GDP. Despite the financial assistance, Greece defaulted on its debt and went through a deep and long recession.
Sovereign Default, Exit and Contagion in a Monetary Union
(with Sylvester Eijffinger and Burak Uras)
Journal of International Economics vol. 113, (2018)
We develop a model with optimal default and monetary-union exit decisions of a small open economy. In our theoretical framework, contagion is explained by the uncertainty of exit cost. The theoretical mechanism we explore reveals that while a high expected exit-cost could improve the credibility of a monetary union, uncertainty governing exit-cost realizations could make countries prone to surges in interest rates when rumors of another member exiting arise. In our numerical example, a Grexit-rumors type of shock can triple the default likelihood of an a priori financially healthy member state.
An older version of the paper appeared as a CEPR DP under the title "Sovereign Debt, Bail-Outs, and Contagion in a Monetary Union"
WORKING PAPERS
Unstable Monetary Unions - The Role of Expectations and Past Experience [pdf] (new version)
This paper presents a theoretical model that is able to capture the importance of past experiences for the stability of a country joining a monetary union. I introduce informational frictions in the form of learning into a model of a monetary union and study how those frictions interact with different economic histories. The model reproduces the patterns observed in the Eurozone, where countries with higher inflation experiences prior to joining the union accumulate more foreign debt and face a higher risk of economic instability.
Exact Present Solution with Consistent Future Approximation: A Gridless Algorithm to Solve Stochastic Dynamic Models [pdf]
with Wouter Den Haan and Pontus Rendahl
This paper proposes an algorithm that finds model solutions at a particular point in the state space by solving a simple system of equations. The key step is to characterize future behavior with a Taylor series expansion of the current period's behavior around the contemporaneous values for the state variables. Since current decisions are solved from the original model equations, the solution incorporates nonlinearities and uncertainty.
WORK IN PROGRESS
Exits and Bailouts in a Monetary Union [pdf]
The lack of exit precedent in a monetary union creates uncertainty about the cost of exit, which might prevent countries from exiting. A first exit can resolve the cost uncertainty and thus provide an incentive to the union to bail out a troubled country. The maximal size of the bailout can substantially exceed the union's marginal valuation of the supported country. The model distinguishes between exit- and default-driven bailouts. It motivates the occurrence of large fiscal transfers (in the form of bailouts) within the EMU and explains why they were insufficient to solve the issues of the supported countries.
Recessionary Wage Flexibility in a Monetary Union - A TANK Approach
with Carolin Spallek
We study how wage flexibility affects the transmission of shocks in a monetary union. We build a two-agent new-Keynesian small open economy model of a monetary union member country. We show that the presence of financially constrained households strengthens the real income channel, hence, leading to shock amplification when prices are not flexible enough. The necessary price flexibility depends on trade openness and the share of constrained households, but not on wage flexibility itself. Our findings shed further doubt on the desirability of wage flexibility in a monetary union.
Global Monetary Policy Spillovers and Sovereign Default