· Published, accepted, and forthcoming papers:
o “Sovereign Default Contagion: A Normative Analysis” with S. de Ferra. Journal of International Economics, Vol. 154, 2025
Abstract: Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that allows for cross-country contagion and that we calibrate to the euro-area periphery. First, we look at the case for cross-country bailouts. We find that unanticipated bailouts improve welfare. However, when bailouts are anticipated, moral hazard arises: governments borrow too much, resort to bailouts too frequently, and welfare declines. Second, we look at the borrowing decision of a global central borrower that maximizes the joint utility of the two countries. We find that the central borrower borrows less than individual countries. As such, defaults are less frequent and welfare increases. Finally, we show that central borrower's borrowing plans can be replicated in a decentralized economy with the introduction of a Pigouvian tax on debt.
o “Differential Treatment in the Bond Market: Sovereign Risk and Mutual Fund Portfolios” with N. Converse, Journal of International Economics, Vol.145, 2023
Abstract: How does sovereign risk affect investors' behavior? We answer this question using a novel database that combines sovereign default probabilities for 27 developed and emerging markets with monthly data on the portfolios of individual bond mutual funds. We first show that changes in yields do not fully compensate investors for additional sovereign risk, so that bond funds reduce their exposure to a country's assets when its sovereign default risk increases. However, the magnitude of the response varies widely across countries. Fund managers aggressively reduce their exposure to high-debt countries and high-risk countries. By contrast, they are more lenient toward core developed markets. In this sense, these economies appear to receive preferential treatment. Second, we document what determines the destination of reallocation flows. When fund managers reduce their exposure to a country in response to its sovereign risk, they shift their assets to countries outside the immediate geographic region while at the same time avoiding countries with high debt-to-GDP ratios and markets to which they are already heavily exposed. These results are supportive of models of sovereign default that assign a nontrivial role to the preferences of international creditors.
o “Natural Disasters, Climate Change, and Sovereign Risk", Journal of International Economics, Vol. 139, 2022.
Abstract: I investigate how natural disasters can exacerbate fiscal vulnerabilities and trigger sovereign defaults. I extend a standard sovereign default model to include disaster risk and calibrate it to a sample of seven Caribbean countries that are frequently hit by hurricanes. I find that disaster risk reduces government’s ability to issue debt and that climate change further restricts government’s access to financial markets. Next, I show that “disaster clauses”, that provide debt-servicing relief, allow governments to borrow more and preserve government’s access to financial markets, amid rising risk of disasters. Yet, debt limits may be needed to avoid overborrowing and a decline of welfare.
o “Sovereign Risk Matters: Endogenous Default Risk and the Time-Varying Volatility of Interest Rate Spreads” with S. de Ferra, Journal of International Economics, Vol. 134, 2022.
Abstract: Emerging market interest rate spreads display substantial time-varying volatility. We show that a baseline model with endogenous sovereign default risk can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, the model features a key non-linearity that allows it to replicate the volatility of interest rate spreads and its comovement with other economic variables. Volatility correlates positively with the level of the spreads and the trade balance and negatively with output and consumption.
o “Domestic Debt and Sovereign Defaults”. Journal of Money Credit and Banking, Vol.54(6), 2022, pages 1741-1775
Abstract: This paper examines how the internal--external composition of government debt affects the government's borrowing policy, sovereign risk, and welfare in a small open economy. To this end, I develop a dynamic stochastic general equilibrium model with endogenous default risk which includes both external and domestic debt. I calibrate the model to Argentina, and I show that the model closely reproduces key empirical moments. Moreover, I highlight the existence of an externality that distorts debt composition: Domestic debt levels are inefficiently low and default risk is inefficiently high. The welfare loss associated with the externality is roughly 0.7% when it is measured in permanent units of consumption. A Pigouvian subsidy that incentivizes domestic purchases of government bonds restores efficiency.
o "What Moves International Stock Markets", with G. Cenedese, Journal of International Money and Finance, Vol. 60, 2016, Pages 94–113.
Abstract: We decompose international equity and bond market returns into changes in expectations of future dividends, inflation, interest rates, exchange rates, and discount rates. Contrary to the typical results reported only for the US, international stock returns are mainly driven by news about future cash flows, rather than discount rates. International bond returns instead are mainly driven by inflation news. Importantly, US real interest rates play a material role in both foreign equity and bond markets. We then turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price action, short-term trend chasing, and long-run overreaction in both equity and bond markets. We also find that international bond flows are more sensitive to US monetary policy relative to equity flows.
· Selected working papers:
o “Geopolitical Risk: When it Matters. Where it Matters. Evidence from International Portfolio Allocations.” with N. Converse
Abstract: Does geopolitical risk lead to financial fragmentation? We answer this question using fund-level data on portfolio allocations of international bond funds. We find that fund managers persistently reduce portfolio weights of countries that are more exposed to geopolitical risk. This is especially true for emerging market economies, and in periods of extreme risk. Financial fragmentation emerges, as portfolios become more concentrated, the number of destination countries drops, and so does the political distance of portfolios relative to the country of residence. End investors also react adversely to geopolitical risk. Net fund flows decline sharply when geopolitical risk increases but recover less than one quarter after the initial shock.
o “Who is Afraid of Sovereign Risk? Evidence from Euro Area Portfolios” with N. Converse and M. Schmitz
Abstract: How do investors react to risk? We answer this question, analyzing how euro-area investors adjust their international portfolios in response to sovereign risk. We find that different investors react differently. Insurances and pension funds reduce their exposure to a country whenever sovereign risk increases in that country. Banks and investment funds, instead, only reduce their exposure when sovereign risk is elevated. Households increase their exposure to a country when sovereign risk increases in that country. However, they quickly unwind their exposure when the sovereign risk becomes excessive. Finally, nonfinancial corporations are insensitive to fluctuations of sovereign risk. We rationalize these findings proposing a theoretical model featuring costly access to information and heterogeneous portfolio adjustment costs.
o “Sovereign Defaults at Home and Abroad” with A. Erce and M. Picarelli, CEPR Discussion Paper No. 18739. CEPR Press, Paris & London 2024.
Abstract: We systematically compare sovereign defaults on debt issued externally and domestically. Defaults at home and abroad are equally frequent, and governments often default selectively. Compared to domestic defaults, external defaults are larger and take longer to resolve. Both external and domestic defaults are often resolved through maturity extensions and coupon reductions. Face value reductions are infrequent, especially as part of domestic restructurings. Yet, domestic defaults are more punitive, as they are associated with larger creditor losses. We also document that domestic and external sovereign defaults occur in markedly different macro-financial, political and geo-economic environments. Our stylized facts inform a growing theoretical literature concerned with sovereign defaults in the presence of domestic debt markets.
o “Selective Sovereign Defaults” with A. Erce, International Finance Discussion Papers 1239. Board of Governors of the Federal Reserve System (U.S.) 2020
Abstract: Governments issue debt both domestically and abroad. This heterogeneity introduces the possibility for governments to operate selective defaults that discriminate across investors. Using a novel dataset on the legal jurisdiction of sovereign defaults that distinguishes between defaults under domestic law and default under foreign law, we show that selectiveness is the norm and that imports, credit, and output dynamics are different around different types of default. Domestic defaults are associated with contractions of credit and are more likely in countries with smaller credit markets. In turn, external defaults, are associated with a sharp contraction of imports and are more likely in countries with depressed import markets. Based on these regularities, we construct a dynamic stochastic general equilibrium model that we calibrate to Argentina. We show that the model replicates well the behavior of the Argentinean economy and rationalizes these empirical findings.