- “On the optimal design of a Financial Stability Fund“ (with Arpad Abraham, Eva Carceles-Poveda and Yan Liu) July 2019.
We develop a model of the Financial Stability Fund (Fund), which can be set by a union of sovereign countries. The Fund can improve the countries’ ability to share risks, and borrow and lend, with respect to the standard instrument used to smooth fluctuations: sovereign debt financing. 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.
- “The Envelope Theorem, Euler and Bellman Equations, without Differentiability” (with Jan Werner), July 2019.
We extend the envelope theorem, the Euler equation, and the Bellman equation to dynamic optimization problems where binding constraints can give rise to non-differentiable value functions and multiplicity of Lagrange multipliers. The envelope theorem — an extension of Milgrom and Segal’s (2002) theorem — establishes a relation between the Euler and the Bellman equation. We show that solutions and multipliers of the Bellman equation may fail to satisfy the Euler equations of the infinite-horizon problem.
- “Introducing an Austrian Backpack in Spain” (with Joao Broguiera de Sousa and Julian Diaz-Saavedra), May 2019.
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 pensions and unemployment insurance (UI).
- “On the Design of a European Unemployment Insurance System” (with Arpad Abraham, Joao Brogueira de Sousa and Lukas Mayr), April 2019.
We study the introduction, and possible design, of a European Unemployment Insurance System (EUIS) using a multi-country dynamic general equilibrium model with labour market frictions. Our calibration provides a novel diagnosis of European labour markets, revealing the key parameters – in particular, job-separation and job-arrival rates – that explain their different performance in terms of unemployment (or employment) and its persistence.
In standard dynamic optimisation problems the failure of Euler equations results in inconsistent multipliers, but not in non-optimal outcomes. However, in problems with forward-looking constraints this failure can result in inconsistent promises and non-optimal outcomes. We also show how the inconsistency problem can be resolved by an envelope selection condition and a minimal extension of the co-state. We extend the theory of recursive contracts of Marcet and Marimon (1998, 2017) to the case where the value function is non-differentiable, resolving a problem pointed out in Messner and Pavoni (2004).[/expand]
- “Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies” (with Gaetano Gaballo), April 2019.
We develop a theory of self-confirming crises in which lenders charge high interest rates because they wrongly believe that lower rates would further increase their losses.
- The EMU after the Euro Crisis: Lessons and Possibilities – Findings and proposals from the Horizon 2020 ADEMU project (edited with Thomas Cooley), VoxEU.org Book, 2018.
This eBook provides an overview of the findings and proposals of the Horizon 2020 ADEMU research project (June 2015 to May 2018), which aimed at reassessing the fiscal and monetary framework of the European Economic and Monetary Union in the wake of the euro crisis.
- “Commitment and Competition” (with Thomas Cooley and Vincenzo Quadrini), May 2018.
Two core principles of economics are that welfare can be enhanced with stronger commitment to individual arrangements (contracts) and with more competition. However, in the presence of search frictions, commitment may deter entry with consequent reduction in the reallocation of human resources. We study these tradeoffs when there are different degrees of commitment in a model with on-the-job search.