Publications

• Risk Pooling, Intermediation Efficiency, and the Business Cycle, with P. Dindo and L. Pelizzon  

Journal of Economic Dynamics and Control, Volume 144 (2022),104500 - [preprint] 

We develop a tractable macro-finance model in which entrepreneurs cannot pool idiosyncratic risks across firms due to restricted market participation. Costly risk pooling is provided by financial intermediaries who also issue safe assets via balance sheet leverage. We characterize the general equilibrium effects that associate intermediation costs with the dynamics of output and show that higher (lower) cost efficiency fosters (weakens) growth but also amplifies (dampens) its fluctuations. The model predicts negative relationships between the financial sector's costs-to-assets and leverage ratios and the business cycle, which we find to hold for the US economy.

• Capital Risk, Fiscal Policy, and the Distribution of Wealth, with Luca Regis 

       Mathematics and Financial Economics, Volume 18, Issue 1 (2024), 1-33  - [preprint]

We develop a continuous-time model of a production economy where households face leverage constraints, uninsurable labour income shocks, and capital depreciation risk. We derive a numerical approximation of the model's competitive equilibrium and compare it with a benchmark economy with no capital risk. Introducing capital risk generates a positive risk premium while fostering aggregate capital accumulation and safe asset demand. At the same time, it exacerbates wealth inequality by making poor households' net worth more volatile than their wealthier peers. In this framework, we investigate the impact of fiscal policy on households' wealth distribution and welfare. Fiscal policy influences the equilibrium wealth distribution by changing the risk premium. This channel unevenly impacts households' consumption and asset allocation decisions, depending on their wage and net worth levels. Tax cuts on risky capital may benefit wealthy or poor households, depending on whether they are financed by raising taxes on safe assets or labour.

Working papers

• Inefficient Bank Recapitalization, Bailout, and Post-Crisis Recoveries (2020)  - Under revision

 [last revised: 01.08.2023] - [slides] 

We study bailouts in a macroeconomic model where banks provide services that facilitate firms' investments but limit their own leverage to prevent costly recapitalizations. This precautionary motive can generate financial crises, in which banks' limited intermediation capacity discourages investments and dampens growth. Bank recapitalizations are constrained-inefficient because they do not internalize that, in the aggregate, higher equity buffers allow for more intermediation, favouring investments and accelerating recoveries. System-wide bailouts can mitigate this inefficiency and improve long-run welfare as long as their positive effect on banks' equity value outweighs their negative impact on risk-taking incentives.

• Dynamic Tax Evasion and Capital Misallocation in General Equilibrium (2022), with Francesco Menoncin and Luca Regis

Collegio Carlo Alberto Working Paper N. 679 - Slides [04.07.2023]  - Submitted

 [last revised: 23.04,2024]

We study tax evasion in a dynamic model where utility-maximizing entrepreneurs face heterogeneous, uninsurable productivity shocks and financial constraints that limit their leverage capacity. The government funds unproductive public spending using income taxes and debt. Entrepreneurs can evade taxes at the risk of being audited and fined. Optimal evasion decreases with individual productivity. This pattern exacerbates capital misallocation due to financial constraints, generating a negative relation between aggregate TFP and the size of the shadow economy. Consistent with the data, this outcome does not transmit evenly across entrepreneurs, being negligible (increasingly prominent) across low (high) percentiles of their productivity distribution. Using public spending to increase government debt can reduce aggregate tax evasion by crowding out low-productivity enterprises. However, this policy is less effective under tighter financial constraints and has heterogeneous cross-sectional consequences.

• Tax Evasion and Public Debt Dynamics (2023), with Rosella Levaggi and Francesco Menoncin [first draft coming soon!] 

We investigate the relationships between tax evasion, public debt stability, and welfare in a general equilibrium production economy model with productivity-enhancing public expenditure. We solve the model for its competitive equilibrium and show that it features stable and unstable equilibria. The possibility of evading taxes shifts the debt-to-GDP levels of the stable (unstable) equilibrium upward (downward), thereby shrinking the length of the stability region that separates them; this effect is more significant in economies with high productivity. Moreover, optimal fiscal policies can be compatible with a positive level of tax evasion, even when auditing is costless.

• Dynamic Tax Evasion and Growth with Heterogeneous Agents (2022), with Francesco Menoncin - Under revision

[last revised: 30.05.2023] - [slides] 

We develop a tractable model of a production economy in which public capital improves aggregate productivity, and the taxpayers have heterogeneous evasion opportunities. We show that, by issuing bonds, compliant taxpayers supply the evaders with an instrument to hedge against auditing risks, thereby expanding their evasion capacity. Moreover, we demonstrate that a higher share of tax evaders reduces the economy's total factor productivity but has a hump-shaped relationship with the growth rate of aggregate capital.

• Financial Frictions and Non-linear Dynamics in Continuous-time Macro-finance Models (2023)  - R&R at Decisions in Economics and Finance

[last revisited 06.10.2023]

 We provide a technical overview of the modelling foundations and the core mechanisms proposed in the recent macro-finance literature, which introduces financial frictions in the form of restricted market participation and occasionally binding leverage constraints in continuous-time general equilibrium models. This class of models is particularly relevant because it can reproduce, in a very tractable framework, the highly non-linear dynamics that associate variations in financial intermediaries' balance sheets with the manifestation of complex phenomena such as time-varying risk premiums, business cycle fluctuations, and economic instability. To complement the survey, we review useful tools from continuous-time optimal control theory to tackle these models and discuss their advantages relative to their discrete-time counterparts.

Work in progress

• Investing in Basic Research: a Portfolio Approach, with Roberto Savona [First draft coming soon]

• Interest Rate Uncertainty and the Dynamics of Public Debt, with Goutham Gopalakrishna

• Bank Dividend Bans and Capital Regulation, with Salvatore Federico and Luca Regis

• Dynamic Bank Runs and Financial Risk Management, with Giorgio Ferrari and Luca Regis

• Shadow Economy and Corruption, with Rosella Levaggi and Francesco Menoncin

We study the endogenous relationship between the shadow economy and corruption in a dynamic model in which utility-maximizing entrepreneurs allocate their assets between legal and illegal activities and pay bribes to reduce the probability of being audited and fined. In this setting, we show that corruption generates additional economic uncertainty, potentially distorting the results of government audit policies and leading to undesirable outcomes. Higher auditing fines make the shadow economy less profitable, thereby curbing corruption incentives. Conversely, more frequent audits can inflate the shadow economy by making corruption more profitable. The vulnerability of the tax system to illegal behaviours does not affect these patterns significantly, suggesting that fiscal parameters play a more critical role in fighting corruption.