- “Making Sovereign Debt Safe with a Financial Stability Fund” (with Yan Liu and Adrien Wicht), December 2021.
We develop an optimal design of a Financial Stability Fund that coexists with the international debt market. The sovereign can borrow long-term defaultable bonds on the private international market, while having with the Fund a long-term contingent contracts subject to limited enforcement constraints. There is a contract that minimizes the debt absorbed by the Fund, guaranteeing full debt stabilization. In equilibrium, the seniority of the Fund contract, with respect to the privately held debt, is irrelevant. We calibrate our model to the Italian economy and show it would have had a more efficient path of debt accumulation with the Fund.
- “Making Sovereign Debt Safe… On-line Appendix” December 2021.
- “Introducing an Austrian Backpack in Spain” (with Joao Broguiera de Sousa and Julian Diaz-Saavedra), December 2021.
In an overlapping generations economy with incomplete insurance markets, the introduction of an employment fund — akin to the one introduced in Austria in 2003, also known as ‘Austrian backpack’ — can enhance production efficiency and social welfare. It complements the two classical systems of public insurance: pay-as-you-go (PAYG) pensions and unemployment insurance (UI). We show this in a calibrated dynamic general equilibrium model with heterogeneous agents of the Spanish economy in 2018.
- “On the Design of a European Unemployment Insurance System“ (with Arpad Abraham, Joao Brogueira de Sousa and Lukas Mayr), December 2021.
We study the welfare effects of both existing and counter-factual European unemployment insurance policies using a rich multi-country dynamic general equilibrium model with labour market frictions. The model successfully replicates several salient features of European labor markets, in particular the cross-country differences in the flows between employment, unemployment and inactivity. We find that mechanisms like the recently introduced European instrument for temporary support to mitigate unemployment risks in an emergency (SURE), which allows national governments to borrow at low interest rates to cover expenditures on unemployment benefits, yield sizable welfare gains, contradicting the conventional classical view that costs of business cycles are small.
- “On the optimal design of a Financial Stability Fund“ (with Arpad Abraham, Eva Carceles-Poveda and Yan Liu) November, 2021.
We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints as part of the contingencies.
- “A Worker’s Backpack as Alternative to the Spanish PAYG Pension System” (with Julián Díaz-Saavedra and João Brogueira de Sousa), November 2021.
With ageing population and historical trends of low employment rates, pay-as-you-go (PAYG) pension systems, currently in place in several European countries, imply very large economic and welfare costs in the coming decades, threatening the sustainability of these systems. In an overlapping generations economy with incomplete insurance markets and frictional labour markets, an employment fund, which can be used while unemployed or retired can enhance production efficiency and social welfare.
- “Conditionality in Official Lending: Compliance through strategic assessment” (with Daragh Clancy, Aitor Erce and Andreja Lenarcic), September 2021.
Countries must comply with loan conditions in order to receive official-sector financial assistance. Although critical for the success of official lending, there is little evidence of what makes for an effective design of such conditions. Using a unique dataset detailing compliance with conditionality in euro area programmes, we provide such evidence. We show compliance is more likely for conditions with explicit numerical targets. We study the drivers of the official lenders’ decision to assess a condition, and whether this decision affects debtors’ ability to meet the condition being evaluated. We find that programme revisions, throught which official lenders agree to modify the assesment schedule, help debtor countries meet the conditions. Our results show that, from the perspective of boosting compliance, the design of official-loan conditionality should be brought closer to the state-contingent approaches employed in the theoretical literature.
- “Fiscal and Currency Union with Default and Exit” (with Alessandro Ferrari and Chima Simpson-Bell), April 2021.
We study the optimal designs of a Fiscal Union with independent currencies and of a Monetary and Fiscal Union (Currency Union) and their relative performance. We derive the optimal fiscal-transfer policy in these unions as a dynamic contract subject to enforcement constraints, whereby in a Currency Union each country has the option to unpeg from the common currency, with or without default on existing obligations. Our analysis shows that the lack of independent monetary policy, or an equivalent independent policy instrument, limits the extent of risk-sharing within a Currency Union. It also shows that the optimal state-contingent transfer policy implements a constrained efficient allocation that minimises the losses of the monetary union; that is, the fiscal transfer policy is complementary to monetary policy.