Research

Publications:


Working Papers and Work in Progress:           

Balance sheet recessions result from concentration of macroeconomic risks on the balance sheets of leveraged agents. In this paper, I argue that information dispersion about the future states of the economy combined with trading frictions in financial markets can explain why such concentration of risk may be privately but not socially optimal. I show that borrowers face a tradeoff between the insurance benefits of financing with macro-contingent contracts and the illiquidity premia they need to pay creditors for holding such contracts. In aggregate, as borrowers sacrifice contingency in order to provide liquidity, the severity of macroeconomic fluctuations becomes endogenously linked to the magnitudes of information dispersion and trading frictions. In this setting, I study the policy implications of the theory and I find that imposing (or subsidizing) macro-contingencies in private contracts is welfare improving.

How effectively does a decentralized marketplace aggregate information that is dispersed throughout the economy? We study this question in a dynamic setting where sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary finite number of informed traders. A common feature is that each seller's trading behavior provides an informative and conditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed traders goes to infinity. Perhaps surprisingly, the answer is no; we provide generic conditions under which information aggregation necessarily fails. In another region of the parameter space, aggregating and non-aggregating equilibria can coexist. We then explore the implications for policies meant to enhance information dissemination in markets. We argue that reporting lags ensure information aggregation while a partially revealing information policy can increase trading surplus.

Monetary Policy for a Bubbly World (under revision, with L. FornaroA. Martin, and J. Ventura)

We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents' expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the inflation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy's ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of conventional and unconventional monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.

Sentiment, Liquidity and Asset Prices (with W. Fuchs and B. Green)

We study a dynamic market for durable assets, in which asset owners are privately informed about the quality of their assets and experience occasional productivity shocks that generate to gains from trade. An important feature of our environment is that asset buyers must worry not only about the quality of assets they are buying, but also about the prices at which they can re-sell the assets in the future. We show that this interaction between adverse selection and resale concerns generates an inter-temporal coordination problem and gives rise to multiple self-fulfilling equilibria. We find that there is a rich set of sentiment driven equilibria, in which sunspots generate fluctuations in asset prices, market liquidity, output and welfare, resembling what one may refer to as ''bubbles.''

Collateral Booms and Information Depletion (Slides, with L. Laeven and A. Martin

We propose a model of collateral booms and busts, in which an increase in collateral values has two effects. First, it raises investment and economic activity. Second, it shifts the composition of investment away from more information-intensive to less information-intensive investment, as a result of reduced screening activity. In this sense, collateral booms raise the economy's stock of ‘‘physical capital'' but deplete its ‘‘informational capital.’’ As a result, we show that collateral booms end in deep crises and slow recoveries: when a boom ends, not only is investment constrained by the ensuing lack of collateral, but also by the lack of informational capital, which takes time to rebuild. We provide empirical evidence using US firm-level data in support of our mechanism.

Informed Intermediation over the Cycle (with V. Vanasco)            

Recursive Competitive Equilibrium with Misspecified Agents (with I. Esponda and D. Pouzo)

Complex Regulation (Slides, with D. Foarta and V. Vanasco)

Security Design with Limited Commitment (Slides, with V. Vanasco)