- “The Envelope Theorem, Euler and Bellman Equations, without Differentiability” (with Jan Werner), June 2021. Journal of Economic Theory, forthcoming.
We extend the standard Bellman’s theory of dynamic programming and the theory of recursive contracts with forward-looking constraints of Marcet and Marimon (2019) to encompass non-differentiability of the value function resulting from the presence of binding constraints or non-unique solutions. The envelope theorem provides the link between the Bellman equation and the Euler equations, but it may fail to do so if the value function is non-differentiable. We introduce an envelope selection condition which guarantees that solutions generated from the Bellman equation satisfy the Euler equations with or without forward-looking constraints.
- “Conditionality in Official Lending: What Works and What Does Not” (with Daragh Clancy, Aitor Erce and Andreja Lenarcic), May 2021.
Countries must comply with loan conditions in order to receive official-sector financial assistance. However, evidence is missing regarding 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 rests on a relatively small number of critical conditions. Ex-ante conditionality is difficult to enforce and compliance is greater for quantifiable loan conditions. We also find evidence of continued negotiation throughout the programme. The redrafting of conditions agreed by official lenders and national authorities boosts compliance. Finally, we show that growth-enhancing structural reforms are of minor importance in determining compliance.
- “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.
- “Lessons from the Great Financial Crisis in perspective,” May 2020. Forthcoming in Y. Cassis and J.J. van Helten (Eds.) The Legacy of the Global Financial Crisis, Bloomsbury.
- “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.