Recent papers
(with C. LeVan and Y. Vailakis)
We study stochastic dynamic programming with recursive utility in settings where multiplicity of values is only attributed to unbounded returns. That is, we consider Koopmans aggregators that, when artificially restricted to be bounded, satisfy the traditional Blackwell's discounting condition (as it certainly happens with linear aggregators). We argue that, when the truncation is removed, the sequence of truncated values converges to the relevant fixed point of the untruncated Bellman operator, whenever it exists, and diverges otherwise. The experiment provides a natural selection criterion, corresponding to an extension of the recursive utility from bounded to unbounded aggregators.
(with P. Reichlin)
We reexamine the tests for dynamic inefficiency in productive overlapping-generations economies with stochastic growth. The size of real, long-term, safe interest rates relative to average GDP growth is an inconclusive test for dynamic inefficiency. A more accurate test should take into account the correlation between growth and the marginal utility of wealth. This typically restricts the room for inefficiency and welfare-improving policies. We also distinguish capital overaccumulation from an inefficient distribution of consumption risk. The refined test for capital overaccumulation is rather stringent: capital is not overaccumulated if the net dividend remains positive with some probability, as opposed to always, as in the original Abel et al. [1]’s formulation.
(with C. LeVan and Y. Vailakis)
We provide a unified approach to stochastic dynamic programming with recursive utility based on an elementary application of Tarski’s Fixed Point Theorem. We establish that the exclusive source of multiple values is the presence of multiple recursive utilities consistent with the given aggregator, each yielding a legitimate value to the recursive program. Unbounded returns are encompassed by means of an approximation method. We also present a spectral radius condition ensuring a unique value to the recursive program in some circumstances. We finally apply our theory to Epstein-Zin preferences. Overall, acknowledging the unavoidable failure of uniqueness in general, we argue that, contrary to a certain practice in the literature, the greatest fixed point of the Bellman operator should have a privileged position.
(with Y. Vailakis)
We study the traditional Eaton and Gersovitz's (1981) model of sovereign debt default under time-varying interest rates and growth. We show that, when long-term interest rates exceed growth, equilibrium is unique and liquidity crises do not occur. High interest rates impose discipline on market sentiments, as creditors necessarily become more optimistic about solvency when the sovereign reduces debt exposure. Creditors' beliefs respond instead ambiguously under low interest rates. As long as interest rates exceed growth, debt reduction alleviates the fiscal burden. However, the sovereign also benefits from the prospect of rolling over outstanding debt while interest rates remain below growth. Thus, creditors' sentiments might adjust adversely to fiscal consolidation. This mechanism sustains belief-driven debt crises even when fundamentals would otherwise ensure solvency