This paper empirically evaluates whether adopting a common currency has changed the ability of euro area member states to share risk. We construct a counterfactual dataset of macroeconomic variables through the synthetic control method. We then use the output variance decomposition of Asdrubali, Sorensen and Yosha (1996) on both the actual and the synthetic data to study if there has been a change in risk sharing and through which channels. We find that the euro adoption has reduced risk sharing and consumption smoothing. We further show that this reduction is mainly driven by the periphery countries of the euro area who have experienced a decrease in risk sharing through private credit.

Presented at: ADEMU Workshop 2016, EUI, LSE Macro Working Group.

We use a quantitative economic geography model to explore subsidy competition among U.S. states. We ask what motivates state governments to subsidize firm relocations and quantify how strong their incentives are. We also characterize fully non-cooperative and cooperative subsidy choices and assess how far away we are from these extremes. We find that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. We also find that observed subsidies are closer to cooperative than non-cooperative subsidies but the potential losses from an escalation of subsidy competition are large. 

I study the role of industries' position in supply chains in shaping the transmission of final demand shocks. First, I use a shift-share design based on destination-specific final demand shocks and destination shares to show that shocks amplify upstream. Quantitatively,  upstream industries respond to final demand shocks up to three times as much as final goods producers. To organize the reduced form results, I develop a tractable production network model with inventories and study how the properties of the network and the cyclicality of inventories interact to determine whether final demand shocks amplify or dissipate upstream. I test the mechanism by directly estimating the model-implied relationship between output growth and demand shocks, mediated by network position and inventories. I find evidence of the role of inventories in explaining heterogeneous output elasticities. Finally, I use the model to quantitatively study how inventories and network properties shape the volatility of the economy.

Presented at: EUI Macro Working Group, EUI Micro Working Group, Collegio Carlo Alberto, ASSET 2019 Conference, RIEF Aix-Marseille 2019, Warsaw International Economic Meeting 2019, the EEA 2019 meeting and European Trade Study Group 2019, Paris School of Economics Macro Workshop, FIW Conference 2019, European Winter Meeting Econometric Society 2019, CERGE-EI Prague, CSEF Naples, University of Zurich, Queen Mary University London, HEC Montreal, ECB Research Department, GVC Conference 2021 at Bank of Italy, WIEN 2021,  EIEF, T2M 2022.

Awarded best paper in International Macro, RIEF Aix-Marseille 2019 and best paper at Warsaw International Economic Meeting 2019.

We study how firm heterogeneity and market power affect macroeconomic fragility, defined as the probability of long-lasting recessions. We propose a theory in which the positive interaction between firm entry, competition and factor supply can give rise to multiple steady-states. We show that when firm heterogeneity is large, even small temporary shocks can trigger firm exit and make the economy spiral in a competition-driven poverty trap. Calibrating our model to incorporate the well-documented trends in increasing firm heterogeneity in the US economy, we find that, relative to 2007, an economy with the 1990 level of firm heterogeneity is 1.5 to 2 times less likely to experience a deep recession. We use our framework to study the 2008–09 recession and show that the model can rationalize the persistent deviation of output and most macroeconomic aggregates from trend, including the behavior of net entry, markups and the labor share. Post-crisis cross-industry data corroborates our proposed mechanism. We conclude by showing that firm subsidies can be powerful in preventing quasi-permanent recessions and can lead to up to a 21% increase in welfare.

Presented at: the EUI, UPF, CSEF, the University of Konstanz, EIEF, University of Nottingham, University of Bonn, Cornell University, Bank of England, the EEA, SMYE, T2M  and the Barcelona Summer Forum (x2).

Covered by NEP-DGE Blog

We study the optimal designs of a Fiscal Union with independent currencies and of a Monetary and Fiscal Union (Currency Union) and their relative performance. We derive the optimal fiscal-transfer policy in these unions as a dynamic contract subject to enforcement constraints, whereby in a Currency Union each country has the option to unpeg from the common currency, with or without default on existing obligations. Our analysis shows that the lack of independent monetary policy, or an equivalent independent policy instrument, limits the extent of risk-sharing within a Currency Union. It also shows that  the optimal state-contingent transfer policy implements a constrained efficient allocation that minimises the losses of the monetary union; that is, the fiscal transfer policy is complementary to monetary policy. At the steady state, welfare is lower than in a Fiscal Union with independent monetary policies. However, with nominal rigidities and only one shock disrupting consumption, risk-sharing reduces the cost of losing independent monetary policy and, as a result, the welfare loss for having a Currency Union can be quantitatively very small. Nevertheless, this almost-equivalence welfare result breaks down when, for example, there is another shock disrupting consumption: the Fiscal Union with independent currencies can confront both shocks separately, which can not be done with the constrained efficient complementary mix in a Currency Union. Importantly, these results -- in particular, the lower value of the Currency Union -- change when there are trade costs associated with independent monetary policies, unless these costs are (counterfactually) negligible. If they are not, Currency Union dominates Fiscal Union. In the latter the constrained efficient fiscal-transfers policy, accounts for these costs, limiting the extent of risk-sharing, while efficiently assigning the trade costs associated with the transfers.  

Presented at: EUI Macro Working Group, Pierre Werner Chair Mini Conference on Debt and Default, ECB DG-R Phd Workshop, Conference on Monetary and Fiscal Policy Coordination at St. Louis FED, SED.

International tax rules are commonly viewed as obsolete as multinational corporations exploit loopholes to move their profits to tax havens. This paper uncovers how international tax reforms can curb profit shifting and impact real income and welfare across nations. We build a model of international corporate tax avoidance under imperfect competition that disentangles profits that stem from real economic activity from paper profits that are booked in tax havens. Our framework delivers a set of ``triangle identities'' through which we recover bilateral profit-shifting flows. Using different data sources ranging from publicly available to firm-level datasets, we find an elasticity of paper profits that is three times larger than the elasticity of the tax base. In our quantitative model, a global minimum tax increases welfare by inducing higher tax revenues and public good provision. It also encourages countries to raise their statutory corporate tax rates as it effectively reduces tax competition. Instead, a border adjustment tax (BAT) that eliminates profit shifting distorts multinational production and may result in welfare losses. A tax reform in the spirit of the destination-based cash-flow tax, combining a BAT with a reduction in the corporate income tax rate may induce efficiency gains at the expense of public good provision. 

presented at Banque de France, City University of London, CESifo, CREST, ECARES, ETH Zurich, European University Institute, Geneva, Kiel, Moscow Higher School of Economics, Nottingham, OECD, Paris 1, Paris School of Economics and at the ERWIT conference, the Villars CEPR Workshop on International Trade, the Mannheim Taxation Conference, the NTA Congress, the CESIfo Area Conference on Public Economics, the 31st FIW Workshop, the Mainz ``Shaping Globalization'' Workshop, the ECARES Workshop on International Corporate Taxation, Bank of Italy ``Trade, value chains and financial linkages in the global economy'' Conference, the NBER Business Taxation in a Federal System Conference and the NBER Summer Institute Macro Public Finance

The EU’s common commercial policy is used as an instrument to realize its values in EU trading partners, reflected in the inclusion of sustainable trade and development chapters in EU preferential trade agreements (PTAs). In this paper we ask if including non-trade provisions (NTPs) in EU PTAs has a systematic positive effect on non-trade outcomes in partner countries. We analyze the relationship between bilateral trade flows, the coverage of NTPs in EU PTAs and the performance of EU partner countries on several non-trade outcome variables using synthetic control methods. We find no robust evidence of a causal effect of including NTPs in EU PTAs on indicators of non-trade outcomes.

In this paper we use a novel approach to address issues of endogeneity in order to obtain a causal effect of leverage on risk taking by banks. Using data on local bank office deposits and local unemployment we construct an instrument to use in a regression of leverage on a measure of risk taking constructed from new issuance of loans. The results (i.) confirm that due to limited liability banks increase their risk taking after an exogenous increase in leverage, and (ii.) that an increase in deposit supply has a direct positive effect on risk taking by banks.

Presented at: EUI Macro Working Group, EUI Microeconometrics Working Group, Queen Mary University PhD Workshop  2018, Copfir Annual Conference 2018, ECSB Research Workshop at Bank of Spain, 2019.

In this note we characterize the potential bias produced by estimating treatment effects via Difference in Difference on data generated through the Synthetic Control Method. We provide a set of assumptions under which it is possible to correct for or sign the bias in the estimated effect.