Research
Completed Working Papers
"Fiscal Rules and Discretion with Risk of Default" (With C. Felli and L. Shi)
Abstract: It is widely believed that governments tend to overaccumulate debt, which gives rise to the need for fiscal rules. This paper studies the optimal fiscal and default rules when governments can default on their debt obligations. We build a continuous-time model that encompasses the standard rationale for debt overaccumulation: hyperbolic discounting and political economy frictions. In addition, governments are subject to taste shocks, which makes spending optimally random. Since shocks are private information, there is a trade-off between rules and discretion. We derive the optimal fiscal rules which are debt-dependent only when default is possible. Depending on the severity of the spending bias and the cost of default, the optimal fiscal rules range from strict debt limits, complemented by strong deficit limits, to the absence of all rules. In intermediate cases, debt-dependent deficit limits must be complemented with default rules, with some areas where default is banned and others where default is mandatory.(Last update: May, 2021)
"Sticky Spending, Sequestration, and Government Debt" (Conditionally accepted AER) (With A. Riboni)
Abstract: Once established, government spending programs tend to continue. Spending inertia can lead to unsustainable debt levels that require fiscal stabilization, such as “sequestration.” We develop a political economy model of debt with sticky spending by assuming that the government must maintain a fraction of past spending. We show that inertia insures against the risk of political turnover, which may reduce politicians’ incentives to accumulate debt. However, if preexisting commitments are large, as in the current U.S. context, inertia exacerbates incentives to increase debt; faced with the prospect of stabilization, the government overspends to “dilute” the spending commitments of past administrations.(Last update: June, 2021)
"Macro and Financial Implications of Aging" (With G. Ordoñez) (New version)
Abstract: The U.S. economy has recently experienced two salient, seemingly unrelated, phenomena: a large increase in post-retirement life expectancy and a major expansion in securitization. We argue they are intimately related. While aging induces an increase in the demand of saving instruments, it also puts pressure on financial innovations that expand their supply. We quantitatively single out the role of securitization in accommodating demographic transitions. In spite of its potential fragility, we show securitization was critical on increasing credit and output by channeling savings for retirement needs towards productive uses."The Macroeconomics of Hedging Income Shares" (Conditionally accepted RED) (previously circulated as: Rising Capital Shares and Risk Sharing) (With A. Grasso & J. Passadore)
Abstract: The debate about the falling labor share brought attention to the income shares trends, but less attention has been devoted to their variability. We analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is shaped by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by capitalists and risky assets by workers emerge naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share."Unemployment Insurance when the Wealth Distribution Matters" (With Hernan Ruffo and Nicholas Trachter)
Abstract: This paper analyzes the welfare effects of unemployment insurance in a life-cycle model, focusing on partial vs. general equilibrium effects. We study an OLG economy with learning-by-doing human capital accumulation. Agents can be employed or unemployed. While unemployed agents costly search for new jobs. We calibrate the model to the U.S. economy, and find that replacement ratio and potential duration are close to the current one. But, in contrast with the previous literature, we find that the optimal policies under general and partial equilibrium are almost the same. Through a series of exercises we conclude that the life-cycle model provides two key components, crucial for welfare evaluation: it emphasizes workers’ insurance needs by accurately reproducing the left tail of the wealth distribution, and generates a realistic response of precautionary savings to transfers.(Last update: March, 2023)
"Coordination, efficiency and policy discretion" (With A. Schneider)
Abstract: Would citizens coordinate to punish a government when they observe suspicious behavior? This paper shows that such coordination could be impossible in an environment with the following characteristics: 1) the aggregate productivity (fundamental) is stochastic, 2) only the government observes it and, 3) agents privately receive a noisy signal about the fundamental. Item 1) implies that the best policy with commitment is state-contingent, while 2)-3) make information incomplete, hindering coordination among agents. We find that, independently of the signal's accuracy, state-contingent policies cannot be an equilibrium and the best sustainable payoff is uniformly bounded away from the efficient one.
(Last update: June 2016)
"Dynamic bargaining over redistribution in legislatures") (With Alessandro Riboni)
Abstract: In modern democracies, public policies are negotiated among elected policymakers. Yet, most macroeconomic models abstract from post-election negotiation. In order to understand the determinants of redistribution, this paper studies legislative bargaining in a growth model where individuals are heterogeneous in their initial capital. Legislators with time-inconsistent preferences negotiate over a linear capital tax. As often the case in actual budget negotiations, we assume that the default option in every legislative session coincides with the previous period's tax. The endogeneity of the status quo forces policymakers to internalize how current decisions affect their bargaining power in future sessions. This channel has far-reaching implications on equilibrium tax levels and on how taxes vary with the institutional environment. On average we obtain capital taxes between 12% and 55%, depending on the distribution of legislators' wealth and on the specifics of the institutions. Finally, we show that political growth cycles arise: decades with low taxes and growing capital are followed by decades with high taxes and decreasing capital (and vice versa).Work in progress
"Limits to stability"
(With Guillermo Ordonez)
Publications
"Optimal COVID-19 Quarantine and Testing Policies" Economic Journal, conditionally accepted. (With Liyan Shi). Download.
"Saving Rates and Savings Ratios" Review of Economics Dynamics, forthcoming (With Guillermo Ordoñez). Download.
"Do Non-Exporters Lose from Lower Trade Costs?" Review of International Economics. Volume29, Issue5, November 2021, Pages 1161-1185. (With Loris Rubini). Download.
"Fiscal Rules as Bargaining Chips." Review of Economic Studies. Volume 88, Issue 5, October 2021, Pages 2439–2478. (with Alessandro Riboni). Download. Download Appendix.
"Cooperatives vs Traditional Banks: The Impact of Interbank Market Exclusion." CEPAL Review. Accepted (With Raphael Bergoeing)
"Macro-Prudential Taxation in Good Times." Journal of International Economics. Volume 121 (C), November 2019. (With Jean Flemming and Jean-Paul L'Huillier). Download. Previously circulated as "News and Macroprudential Policy"
"Barriers to Firm Growth in Open Economies." BE Journal of Macroeconomics. De Gruyter, vol. 19 (1), pages 1-36, January 2019. (with Loris Rubini). Download.
"Spending biased legislators: discipline through disagreement." Quarterly Journal of Economics. Volume 130, Issue 2, May 2015. (with Alessandro Riboni) Download. Download presentation.
"The Whole is greater than the sum of its parts: Complementary reforms to address microeconomic distortions." World Bank Economic Review. World Bank Group, vol. 30(2), pages 268-305, July 2016. (With Raphael Bergoeing and Norman Loyza). Online Appendix: intuition
"Heterogeneous labor skills, the median voter and labor taxes." Review of Economics Dynamics. Volume 16, Issue 2, April 2013. (with Anderson Schneider) Download. Data and code Download.
"Costly Financial Intermediation in Neoclassical Growth Theory." Quantitative Economics. Volume 2, Issue 1. March 2011 (with Rajnish Mehra and Edward Prescott) Download. Download appendix.
"Labor Market Distortions, Employment, and Growth: The Recent Chilean Experience." General Equilibrium Models of the Chilean Economy. R. Chumacero and K. Schmidt-Hebbel, eds., Banking and Development Series, Central Bank of Chile, 2004. (with Raphael Bergoeing and Felipe Morande) Download
"Innovaciones en Productividad y Dinámica de Plantas." Revista de Análisis Económico, Volumen 18, Issue 2, pp. 3-32, December 2003. (with Raphael Bergoeing) Download
Other Publications
"Breaking Down the Barriers to Firm growth in Europe " (2012) The Fourth EFIGE Policy Report, August 2012, Bruegel Blueprint 18. (with L. Rubini, K. Desmet and A. Crespo). Download