- “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.
- “The Austrian Backpack as Alternative to the Spanish PAYG Pension System” (with Julián Díaz-Saavedra and João Brogueira de Sousa), March 2021.
With ageing population and historical trends of low employment rates, pay-as-you-go (PAYG) public 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.
- “Making Sovereign Debt Safe with a Financial Stability Fund” (with Yan Liu and Adrien Wicht), May 2020.
This paper further advances the design of an optimal Financial Stability Fund (Fund) of Abraham et al. (2019) by not having the Fund absorbing all the sovereign debt of a country. The Fund’s long-term contracts are subject to two-sided limited enforcement constraints: at any point in time the borrowing country may breach the contract and exit, while the Fund cannot have expected losses. The country’s constraint therefore represents a sovereignty constraint, whereas the lenders’ constraint can be interpreted as a debt sustainability analysis (DSA). The country can borrow one-period defaultable bonds on the private international market, while having a state-contingent contract with the Fund, which provides insurance and, possibly, credit.
- “On the Design of a European Unemployment Insurance System” (with Arpad Abraham, Joao Brogueira de Sousa and Lukas Mayr), September 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.
- “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.
- “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).
- 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.