Research

Working Papers

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

Private Overborrowing under Sovereign Risk (Submitted, latest version: December 2021)

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)