"Hyperbolic Discounting with Random Gratification" (With Liyan Shi)
Abstract: We analyze the dynamic problem of decision makers with quasi-hyperbolic discounting and random shocks to temptation. We show that this problem is equivalent to that of a time-consistent agent who assigns biased weights to future shocks. This equivalence provides a straightforward methodology for finding, theoretically and numerically, the Markov equilibrium with hyperbolic agents. Through this equivalent problem, we prove the existence and uniqueness of the Markov equilibrium under mild conditions. Furthermore, if the weights constitute a probability measure, the decision maker can be interpreted as optimistically biased, ensuring a unique equilibrium with continuous decision rules and implying no value for commitment devices. Otherwise, there is intertemporal "conflict'' between present and future selves: if the conflict is limited, uniqueness is guaranteed."Fiscal Unions with Present Biased Governments" (With Jacopo Orlandi)
Abstract: This paper studies the relationship between fiscal rules and intergovernmental transfers within a federation. We analyze an environment where present-biased governments must insure against future shocks. The present bias generates a reason for fiscal rules to exist, while risk sharing motives bring out the need for transfers. A central authority designs the optimal combination of state contingent transfers and fiscal rules that maximize the federation's welfare. We show that independently of the present bias, it is optimal to achieve the first-best pattern of aggregate spending. However, how it is implemented depends on the intensity of the bias. When the bias is mild, a mechanism akin to an emergency fund with tight fiscal rules arises, while when the bias is severe, it is optimal to provide loans with contingent payments and to loosen up fiscal rules. Moreover, there is always a degree of bias for which a fiscal union is not optimal.(Last update: April, 2025)
"Optimal Redistribution with Government Debt" (With Kirill Shakhnov)
Abstract: We analyze the tight relationship between government debt and redistribution in Overlapping Generations Economies (OLG). We do so in an heterogeneous agents economy where the government collects capital and progressive labor taxes to pay government spending, debt, and redistribute income. In this environment, the Ramsey planner uses all taxes, even in the long run. We show that rising inequality leads not only to more progressivity, but also to more government debt and capital taxation. The necessary increase in debt to achieve the optimal redistribution policy can be substantial. We explore how limits to government's borrowing choices severely restrict its ability to redistribute income. We calibrate the model to the U.S. in the 2000-10 decade and estimate the optimal response to the observed change in inequality. We find that the optimal level of debt should approximately double.(Last update: March, 2025)
"Fiscal Rules and Discretion with Risk of Default" (With Chiara Felli and Liyan 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, 2025)
"Macro and Financial Implications of Aging" (With Guillermo Ordoñez)
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.(Last update: February, 2025)
"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: December, 2024)
"Coordination, efficiency and policy discretion" (With Anderson Schneider)
(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)."Limits to stability"
(With Guillermo Ordonez)
"Sticky Spending, Sequestration, and Government Debt" American Economic Review, vol. 114, no. 11, November 2024 (pp. 3513–50) . (With Alessandro Riboni) . Download.
"The Macroeconomics of Hedging Income Shares" Review of Economics Dynamics. Volume 54, October 2024. (With Adriana Grasso & Juan Passadore) . Download. Online Appendix.
"Optimal COVID-19 Quarantine and Testing Policies" The Economic Journal, vol. 132(647), pages 2534-2562. October 2022. (With Liyan Shi). Download.
"Saving Rates and Savings Ratios" Review of Economics Dynamics, vol. 46, pages 365-381, October 2022 (With Guillermo Ordoñez). Download.
"Do Non-Exporters Lose from Lower Trade Costs?" Review of International Economics. Volume 29, Issue 5, 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. N. 138, Pages 208-22 December 2022. (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
"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