Ongoing Research Projects:
1. Limits to Monetary Policy

2. Global Policies Coordination

3. Inflation Target Revisited

Working Paper:

"Employment and Financial Stability: Dual Goals of Capital Flow Management." Revise and Resubmit at the Review of Economic Dynamics.

Abstract: I study optimal capital flow management in a small open-economy DSGE model with two frictions: downward nominal wage rigidity and a price-dependent collateral constraint. Wage rigidity introduces an aggregate demand externality under fixed exchange rates and the collateral constraint introduces a pecuniary externality. I provide an analytical characterization of the optimal capital flow management measures and show how they mitigate the externalities. Specifically, I find that the optimal policy in this economy is a prudential tax that discourages capital inflows when the risk of financial crisis is high or when wage is increasing, and it is a stimulative subsidy that encourages capital inflows when unemployment is high and the risk of financial crisis is low. Using quantitative methods and standard calibration, I show that the optimal state-contingent capital inflow tax and even a non-state-contingent flat tax can significantly reduce unemployment and prevent financial crises, hence ultimately improving welfare. These results are of particular relevance for members of a currency union or emerging economies with an exchange rate peg.

Journal Article:

1. Capital Flow Deflection. (with Paolo Giordani, Michele Ruta, Hans Weisfeld.) 
 Journal of International EconomicsVolume 105, March 2017, Pages 102–118.

Abstract: This paper takes a novel look at the coordination problem of capital controls among borrowing countries. In a simple model of capital flows and controls, we show that inflow restrictions imposed by a country distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1996 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other borrowing countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response.  

Journal of Money, Credit and Banking, Volume 43, Issue 6, pages 1185–1215, September 2011. 

Abstract: This paper identifies two mechanisms that empirical papers on central bank independence assume to be embedded in the yardstick measure of turnover rate of central bank governor: (i) the removal of a governor who is perceived as a challenger by the government and (ii) whether his/her replacement is an ally of the government. We identify the first mechanism with premature exits of central bankers and the second by examining whether or not the incoming governor is drawn from the ranks of the executive branch of the government. We find that only premature exits and replacements with government allies increase inflation.

“A good scientist spends his whole career questioning his own facts. One of the most dangerous things you can do is (to) believe.” -- The New Yorker