Research
Research
Sovereign Default, Debt Renegotiation and the Exchange Rate Regime
Abstract: This paper introduces debt renegotiation in an optimal default, small open economy model with two goods and nominal labor market rigidity to replicate the joint occurrence of default and debt restructuring, under both a floating and a fixed exchange rate regime. The model is formulated as a decentralized borrowing, centralized default model, then solved numerically as an optimal policy problem and calibrated to the economy of Argentina, to match the default episode of 2001-2002. Under the assumption of a currency peg, the nominal rigidity in the labor market becomes a real rigidity and generates involuntary unemployment during the crisis, whereas full employment is always feasible under the optimal devaluation policy. The model is able to replicate the magnitude of the sovereign spread of the country during the period of financial turmoil and to give reasonable estimates of the haircut on defaulted debt.
Natural Disasters and Sovereign Default (with Barbara Annicchiarico)
Abstract: This paper presents an extended version of the canonical sovereign default model by incorporating capital accumulation and natural disasters. Extreme event risk is modeled as an i.i.d. shock that destroys installed capital, thereby reducing output and impairing the economy's solvency. The introduction of this additional source of risk raises the sovereign spread of the small open economy for any given combination of TFP, external debt, and installed capital, relative to an otherwise identical model economy that is not subject to extreme events. Higher sovereign spreads imply that the economy exposed to extreme weather risk can sustain less debt in equilibrium, thereby reducing its ability to smooth consumption and support capital accumulation through external finance. In turn, the lower average debt outstanding leads to a reduction in the frequency of default episodes.
Greening Europe in a Turbulent World (with Barbara Annicchiarico, Fabio Di Dio, and Francesca Diluiso)
Abstract: This paper explores the interaction between the state of the economy over the business cycle and the macroeconomic consequences of climate policies, with a focus on output, inflation, and financial stability. In particular, it investigates how large shocks—such as financial crises, pandemics, or energy price surges—affect the macroeconomic costs of the green transition. It also examines how stabilization policies can be designed to preserve price stability and enhance the resilience of the economy to external shocks during this transition.To address these questions, we develop a medium-scale Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model estimated for the Euro Area. The model is specifically designed to capture the economy’s response to financial disruptions, pandemics, and energy crises. Using this framework, we construct a range of mitigation scenarios under different assumptions regarding the occurrence of such shocks. We then assess how various stabilization policies can support the economy throughout the green transition.