Research
Working papers
Optimistic Expectations and Financial Crises (Job Market Paper)
I evaluate whether recessions accompanied by financial crises are different in a framework where pre crisis dynamics – especially debt burden – and expectations play a role in determining the magnitude of the recession. This is consistent with some empirical evidence. I model financial optimism as unrealised news on capital quality in a DSGE framework with financial intermediaries. I found that cycles associated with financial optimism differ from those caused by technological news: the former generate asset prices boom-bust cycles, stronger debt cycles and deterioration in banks’ net worth. Real variables respond in a similar qualitative way to unjustified optimism, whether it produces a financial crisis or not.
Keywords: Financial crises, deep recessions, slow recoveries, debt overhang, news shocks, boom – bust cycles.
It has being frequently claimed that financial crises are more painful and lead to slower recoveries partly because of excessive debt accumulation prior to the crisis (v.g. Reinhart & Rogoff, 2009; Hong and Tornell, 2005; Jordà, et al., 2013). This contrast with the view that magnitude and persistence of recessions is not associated with financial crises, instead they are simply the consequence of bigger and more persistence shocks (Stock & Watson, 2012). In this paper I evaluate whether any of these views is able to explain both, deep recessions and slow recoveries by computing average recovery and recession paths through the estimation of impulse responses by local projections methods (Jordà, 2005). I found that the occurrence of financial crises is associated with more severe recessions only if the recession itself is big enough. But this effect disappears when the output loss caused by the recession is below the historical average. More importantly, neither the magnitude of the loss, nor the occurrence of financial crises, nor debt accumulation are associated with sluggish output growth during recoveries.
Keywords: Financial Crises, Deep Recessions, Slow Recoveries, Local Projections, Business Cycles, Debt Over-hang.
Work in Progress
Accounting for pure news shocks in business cycles
Description: In this project I aim to quantify the importance of financial and technological purely noisy news in the business cycles by using the information we can get from estimated DSGE models. Previous literature quantifies news shocks but do not differentiate between realised and unrealised news. Since the more interesting dynamics in simulated models arise when expectations are wrong, it is important to distinguish between the two categories of news. A fist steep in this direction is the paper by Sims (2016) where he introduced a novel variance decomposition strategy. Unlike him, I use the information of real episodes where the news shocks were counteracted by contemporaneous shocks. In this way, I should be able to isolate the effect of unrealised news rather than the anticipation effect of both unrealised and realised news.
Skill biased labour mobility and slow recoveries
Description: The aim of this project to quantify the importance of skill biased migration in determining the growth rate during economic recoveries following deep recessions. If highly productive people abandon economies with worse outcomes after an economic crisis, the later not only affects physical capital, but also human capital. In that sense, a crisis may reduce the stock of human capital and, through a brain drain effect, productivity. That could help to explain the wide dispersion in the speed of recovery between economies with similar level of development. To answer this question I use data of inter-state migration and growth for the U.S. And international migration within the Euro Area.
Other Publications
Financial fragility and exchange rate, 2011 (in Spanish)
Abstract: A modification to the Foley (2003) model is presented here introducing the role of exchange rate and foreign currency denominated debt in order to determine their influence on financial fragility, using the financial instability hypothesis of Hyman Minsky under flexible exchange rate regime. Firms' financial positions (hedge, speculative, and Ponzi) are affected by the movements of the exchange rate and of the interest rate. In the model nominal depreciation has real effects and may cause financial and economic crises. Sudden depreciation leads to reductions in profit and investment rates through increases in credit costs and supply prices of capital goods .
Key words: financial crisis, post-keynesian macroeconomic models, exchange rate, private sector foreign debt. JEL: E12, E32, F41, G01.