Research

Published and Forthcoming Papers

Is a Fiscal Union Optimal for a Monetary Union? (with Eugenia Gonzalez-Aguado, Patrick Kehoe and Elena Pastorino)[paper][codes][appendix] 

Journal of Monetary Economics (2024)

(100th CRNYU conference)

When is a fiscal union appropriate for a monetary union? In a monetary union without fiscal externalities, when local fiscal authorities have an informational advantage over a central fiscal authority in terms of their knowledge of countries' preferences for government spending, a decentralized fiscal regime dominates a centralized one. Our novel result is that in the presence of fiscal externalities across countries, however, a decentralized fiscal regime is optimal for small monetary unions, whereas a centralized fiscal regime is optimal for large ones. These results shed new light on the debate on fiscal integration within the EU and its enlargement.

Working Papers

Optimal Risk Sharing and Incentive Provision in Social Security Systems: A Mechanism Design Approach (with Carlos E. da Costa)[paper]

This paper has previously circulated with the title "Who should bear the risk of economic growth?"

This paper investigates how risk should be shared between workers who require incentives and retirees who do not. We analyze the impact of incentives on workers' ability to bear risk and examine how the timing of incentives through entitlements should vary depending on the state of the economy. Our findings suggest that perfect risk sharing is optimal when the utility from consumption is logarithmic or when aggregate productivity growth is independent and identically distributed. Our numerical analysis suggests that the deviation from perfect risk sharing is small. We relate the quantitative findings to the failure of a consumption-based stochastic discount factor (SDF) to price economic growth, which is reminiscent of the equity premium puzzle. Once we augment our model with shocks that generate volatile enough SDFs, numerical deviations from perfect risk sharing are substantial.

Optimal Investment Time under Moral Hazard (with Otavio Rubiao)[new draft coming soon]

This paper studies the relationship contract between an investor (principal) and a financial advisor (agent). The agent is hired to search for investment opportunities, to recommend the investment timing, and to take costly unobservable actions that increase the likelihood of finding good investment opportunities. The principal can incentivize the agent by conditioning the scheduled payments on the current and past values of investment opportunities. Formally, time is continuous and the value of the potential investment follows a Brownian motion with drift controlled by the agent's actions. The principal and agent share the same discount rate and are risk-neutral, but the principal faces a limited liability constraint that restricts payments to be nonnegative. The optimal contract can be characterized by the solution of a partial differential equation, with boundaries that pin down the optimal investment rule. The first and the second best investment decision follows a cutoff rule, i.e. they will invest in the project whenever its value surpasses a threshold. Our novel result is that as long as the agent's continuation value is positive, the second-best stopping rule will be the same as the first-best one, entailing the exact same threshold.  Whenever the continuation value reaches zero, it becomes impossible to incentivize the agent and they are retired.