Published and accepted papers

Dynamic Self-Fulfilling Fire Sales  (with Paymon Khorrami) 

Accepted, Journal of Finance

Why do fire sales occur if many risks are hedgeable? We study a version of Brunnermeier and Sannikov (2014) in which all fundamental risks can be hedged frictionlessly. Our analysis shows that fire sales are inherently self-fulfilling. Fundamental shocks can never cause fire sales, and an efficient, safe equilibrium exists. On the other hand, there exists an equilibrium in which agents coordinate fire sales on non-fundamental shocks. A simple refinement based on vanishingly-small perceived fundamental risk eliminates the safe equilibrium and selects the fire sale equilibrium as the unique outcome.

Working Papers

Rational Sentiments and Financial Frictions  (with Paymon Khorrami)   

Revise & Resubmit, Review of Economics Studies

We discover sentiment-driven equilibria in popular models of imperfect risk sharing. In these equilibria, sentiment dynamics behave like uncertainty shocks, in the sense that self-fulfilled beliefs about volatility drive aggregate fluctuations. Because such fluctuations can decouple from the wealth distribution, rational sentiment helps resolve two puzzles plaguing models emphasizing balance sheets: (i) financial crises emerge suddenly, featuring large volatility spikes and asset-price declines; (ii) asset price booms, with below-average risk premia, predict busts and financial crises. Methodologically, our contribution is using stochastic stability theory to establish existence of sunspot equilibria. 

Fear, Indeterminacy, and Policy Responses  (with Paymon Khorrami)

Contrary to conventional wisdom, this paper shows that Taylor rules fail to eliminate an entire family of stochastic equilibria in New Keynesian models. Such equilibria feature self-fulfilling real uncertainty, and risk premia, arising in recessions. An enriched monetary rule targeting risk premia can restore determinacy but becomes infeasible in the presence of any lower bound to interest rates. By contrast, a large class of fiscal policies eliminates self-fulfilling uncertainty and ensures determinacy. This uniqueness holds in many contexts, including: under an interest rate peg or Taylor rule, with short-term or long-term debt, and with fiscal rules. 

Risky low-volatility environments and the stability paradox, Online appendix   

Can low risk be risky? In this macro-financial model, smooth business-cycle-frequency fluctuations may disguise vulnerability to panics. Self-fulfilled panics trigger collapses in asset prices and output. When moderately capitalized, the financial sector uses debt to shield allocation efficiency from real shocks, smoothing business-cycle-frequency fluctuations and supporting high asset prices. However, an indebted financial sector, coupled with high asset prices, fuels the exposure to panics: these low-volatility environments are, indeed, risky. A stability paradox emerges: more stable fundamentals lead to a less stable economy, more prone to panics. Importantly, business-cycle-frequency risk, and not the exposure to collapses, drive portfolio allocations.

Dormant Working Papers

Safety Traps in a Global Economy (with Julius Vutz)

We study the consequences of global safe asset shortages over aggregate economic activity. The model features two countries: Home and Foreign. Home has more developed financial markets and a lower share of risk-averse agents. Foreign’s safe asset demand pushes the global economy into a safety trap --a liquidity trap in the market for safe assets-- depressing output in both countries. Under distortionary taxes, safe public debt provision expands output globally but generates wasteful distortions only for the issuing country. Hence, there is a global under-provision of safe public debt. If Home closes down its capital account, it avoids the safety trap but increases its debt service cost and forgoes the net interest income from its international asset position.