Research

Working Papers


Tax Revolts and Sovereign Defaults    (with Jan Morgan and Nicolas WerquinLatest version: February 2024

Abstract: 

Protests and fiscal crises often coincide, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina during the Macri administration (2015-2019). In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal policies of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises concurrent with fiscal turmoil. We find that left-leaning parties are more prone to default, while right-leaning parties sustain higher debt levels. Revolts impact default risk through two channels. First, political crises can increase sovereign risk by facilitating transitions from right-wing to left-wing administrations that culminate in default. Second, the threat of frequent revolts during default periods can deter the government and increase commitment. In our calibration, the latter channel dominates the former with revolts operating as an endogenous default cost. Relative to a model without revolts, our framework can sustain higher levels of debt and reduce the frequency of defaults.

Federal Reserve Bank of Chicago working paper version


Overborrowing, Underborrowing, and Macroprudential Policy   ( Revise and Resubmit Journal of Economic Theory, with Julien Bengui and Javier BianchiLatest version: January 2024

Abstract: 

In this paper, we revisit the scope for macroprudential policy in production economies with collateral constraints. We characterize whether the competitive equilibrium features over- or under-borrowing and examine the extent to which it depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium.  In our quantitative analysis,  macroprudential taxes on borrowing turn are larger when the government has access to ex-post stabilization policies.

Federal Reserve Bank of Chicago working paper version


Abstract: 

We propose a macroprudential theory of foreign reserve accumulation that can rationalize the secular trends in public and private international capital flows. In middle-income countries, the increase in international reserves has been associated with elevated private capital inflows, both in the aggregate and in the cross-section, and reserve holdings have been more prominent in economies with a more open capital account. We present an open economy model of financial crises that is consistent with these features. We show that the optimal reserve accumulation policy leans against the wind, raising gross private borrowing while improving the economy's  net foreign asset position and reducing the exposure to financial crises.

Federal Reserve Bank of Chicago working paper version

Abstract: 

This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and optimal macroprudential policy.

Federal Reserve Bank of Chicago working paper version


Abstract:

We explore the implications of household heterogeneity on the design and implementation of optimal macroprudential policies. We document that countries with higher levels of inequality exhibit higher levels of private borrowing and more recurrent sudden stop crises. We develop a production economy where households are heterogeneous in their labor productivity and have access to international credit markets subject to a collateral constraint that depends on their market income. As a result, high income households also have a higher borrowing capacity. We study the implications of this mechanism for the choice of labor and borrowing taxes for a government who faces a trade-off between decreasing the probability of a sudden stop and redistributive concerns.

Selected Work in Progress

International Business Cycle with China (with Vytautas Valaitis and Alessandro T. Villa)