Research

Domestic and External Sovereign Debt (with Paola Di Casola) Sveriges Riksbank Working Paper n.345 latest version

R&R International Economic Review

We develop a model of domestic and external sovereign debt, where market segmentation, in conjunction with financial repression, makes sovereign default costly. In a small open economy characterized by a scarcity of domestic private saving instruments, the government can financially repress domestic bondholders to issue cheap domestic debt, by imposing capital controls. However, under these market conditions, domestic debt issuance features a decreasing marginal benefit. The government counteracts this costly side of financial repression, by issuing also external debt in the international financial market, extending further its debt capacity. A default temporarily disrupts the trade in these segmented debt markets. Among other empirical regularities of emerging and developing economies, our model can replicate the domestic and external sovereign debt levels, while crucially being in line with the evidence on negative real interest rates on sovereign debt

Towards technology news-driven business cycles (with Paola Di Casola) Sveriges Riksbank Working Paper n.360 latest version (updated October 2021)

R&R Journal of Money, Credit and Banking

We propose a novel identification of technology news shocks, where technology is measured with a patent-based innovation index or TFP. Distinguishing them from non-technology shocks with long-lasting effects on the economy, we uncover that technology news shocks behave like demand shocks - positive technology news increase real economic activity and inflation. Distinctively, they do not generate a stock market boom, while inducing asymmetric responses of technology across manufacturing subsectors, pointing towards the idea of creative destruction. Anticipated technological changes became the leading source of U.S. economic fluctuations from the 80's, due to their improved financial transmission.

TFP news, stock market booms and the business cycle: Revisiting the evidence with VEC models (with Paola Di Casola) Sveriges Riksbank Working Paper n.388 latest version

Beaudry and Portier (2006) provide support for the "news view" of the business cycle, using a vector error correction model. We show that this result hinges on a cointegrating relationship between TFP and stock prices that is not stationary, thus making the estimates not reliable. If we alter the TFP measure and change the model specification, we can recover the news shock through their identification. However, the news shock leads to a stock market boom with a negligible impact on economic activity. Our findings are in line with studies that identify news shocks without relying on VEC models.

Composition of Sovereign Debt and Financial Development: a Dynamic Heterogeneous Panel Approach (with Paola Di Casola) latest version

How does financial development affect the composition of sovereign debt in the long-run? It has been argued that improvements of financial institutions have a crowding-in effect on the domestic debt share due to the increase in savings. Our hypothesis is that there is also a crowding-out effect, because improvements in financial institutions imply more availability of private assets that compete with government bonds for the domestic savings. Hence, financial development should have a non-monotonic effect on the domestic debt share. We employ dynamic heterogeneous panel models to distinguish long-term from short-term effects and allow for cross-country heterogeneity in time-invariant features and dynamics. Moreover, we control for the presence of unknown common factors. The non-monotonic effect of financial development on the domestic debt share is robust to different proxies of financial development and the inclusion of relevant macroeconomic variables.

Accounting for cross-country comovement in small open economy models (with Jesper Lindè, Henrik Lundvall, Conny Olovsson)

Financial integration and sovereign debt (with Paola Di Casola)

Social Norms and Authority: in Quest for Social Order (with Paola Di Casola, Eleonora Freddi)