Publications

A Theory of Foreign Exchange Interventions (joint with Ludwig Straub)

The Review of Economic Studies, 88-6, 2857-2885,  2021.

Abstract: We study a real small open economy with two key ingredients: (i) partial segmentation of home and foreign bond markets and (ii) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry-trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (a) the optimal policy leans against the wind, stabilizing the exchange rate; (b) it involves smooth spreads but allows exchange rates to jump; (c) it partly relies on “forward guidance”, with non-zero interventions even after the shock has subsided; (d) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

Resolution of Financial Crises (with Martín Gonzalez-Eiras)

Journal of Economic Dynamics and Control, 133, 2021

Abstract: A financial crisis creates substantial wealth losses. How these losses are allocated determines the magnitude of the crisis and the path to recovery. We study how institutions and technological factors that shape default and debt restructuring decisions affect the amplification of aggregate shocks. For sufficiently large shocks, agents renegotiate. This limits the losses borne by borrowers, shutting the amplification mechanism via asset prices. The range of shocks that trigger renegotiation is decreasing in repossession costs and increasing in default costs, if the latter are public information. Private information may induce equilibrium default but, by allowing agents with high default costs to extract a larger haircut, facilitates the recovery. The model is consistent with evidence from real estate markets in the U.S. during the Great Recession; and rationalizes recent changes in U.S. Bankruptcy Code in the wake of the COVID-19 crisis.

Survival in Export Markets (joint with Facundo Albornoz and Juan Carlos Hallak)

Journal of International Economics, 102, 262-281, 2016

Abstract: This paper explores the determinants of firm survival in export markets. We build an exporter dynamics model where firms need to pay market-specific sunk and fixed costs to operate abroad and where firm export profitability in each foreign market follows a geometric Brownian motion. Firms also differ ex ante by a constant market-specific profitability shifter. We derive the probability of export survival upon entry in a market and show that it increases with the ratio of sunk to fixed costs and is insensitive to the profitability shifters. Also, we show that the survival probability is unaffected by fixed costs if sunk costs are zero. We take the model to the data using firm-level Argentine export information. We find that survival rates decrease with distance, which the model rationalizes with sunk costs that increase with distance proportionally less than fixed costs. Estimated sunk costs are small. In fact, a counterfactual exercise shows that removing those costs increases aggregate exports by less than 1.5%. Finally, we also find that survival increases with a firm’s export experience. Analogously to distance, the model’s implication of this empirical result is that experience reduces sunk costs proportionally less than fixed costs. 

Reglas Fiscales, Ciclo y Volatilidad Macroeconómica

Revista de Economía Política de Buenos Aires, 9-10, 181-225, 2011

Abstract: The article analyzes the relationship between anti-cyclical fiscal policy, debt sustainability, and macroeconomic volatility under different fiscal rules. We review the literature and present a set of stochastic simulations for Argentina, Brazil, Chile and Mexico, based on a VAR model. The model includes the terms of trade, as in the case of the Chilean rule. We conclude that the tradeoff between stabilizing public debt and implementing counter-cyclical policies depends critically on the degree of volatility of the macroeconomic context; overlooking this fact may result in explosive debt paths or volatile public borrowing needs