- “On a Lender of Last Resort with a Central Bank and a Stability Fund” (with Giovanni Callegari, Adrien Wicht and Luca Zavalloni), 2023, Review of Economic Dynamics, 50, 106-130.
We explore the complementarity between a central bank and a financial stability Fund in stabilizing sovereign debt markets. The central bank pursuing its mandate can intervene with public sector purchasing programs, buying sovereign debt in the secondary market, provided that the debt is safe. The sovereign sells its debt to private lenders, through market auctions. Furthermore, it has access to a long-term state-contingent contract with a Fund: a country-specific debt-and-insurance contract that accounts for no-default and no-over-lending constraints. The Fund needs to guarantee gross-financial-needs and no-over-lending. We show that these constraints endogenously determine the ‘optimal debt maturity’, structure that minimizes the Required Fund Capacity (RFC) to make all sovereign debt safe. However, the Fund may have limited absorption capacity and fall short of its RFC. The central bank may be able to cover the difference, in which case there is perfect complementarity and the joint institutions act as an effective ‘lender of last resort’. We calibrate our model to the Italian economy and find that with a Fund contract its ‘optimal debt maturity’, is 2.9 years with an RFC of 90% of GDP, which is above what the European Stability Mechanism (ESM) could reasonably absorb, but may be feasible with an ECB Transmission Protection Instrument (TPI) intervention. In contrast, the average maturity of Italian sovereign debt has been circa 6.2 years, with a needed absorption capacity of around 105% of GDP, which may call for a maturity restructuring to ease the activation of TPI.
- “A Worker’s Backpack as Alternative to the Spanish PAYG Pension System“ (with Julián Díaz-Saavedra and João Brogueira de Sousa), 2023, Journal of the European Economic Association (JEEA), 21(5), 1944–1993.
Facing an 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. 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.
- “On the Design of a European Unemployment Insurance System” (with Arpad Abraham, Joao Brogueira de Sousa and Lukas Mayr), 2023, European Economic Review, 156, 104469.
We study the welfare effects of both existing and counter-factual European unemployment insurance (UI) 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, as a result of labour market and UI policy differences across euro area countries. 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 risk, yield sizeable welfare gains.
- “Introducing an Austrian Backpack in Spain” (with Joao Broguiera de Sousa and Julian Diaz-Saavedra), 2022. SERIEs, 13, 513-556.
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.
- “Lessons from the Great Financial Crisis in perspective,” in Y. Cassis and J.J. van Helten (Eds.) The Legacy of the Global Financial Crisis, Bloomsbury, (2021).
- “The Envelope Theorem, Euler and Bellman Equations, without Differentiability” (with Jan Werner), 2021. Journal of Economic Theory, 196, 105309.
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.
- “Euro area fiscal policies and capacity in post-pandemic times” (with Adrien Wicht), European Parliament, Economic Governance Support Unit (at the request of the ECON Committee), PE 651.392 – June 2021.
The main legacy of the post-Covid-19-crisis euro area fiscal framework should be the development of a unique integrated fiscal policy and of a permanent and independent Fiscal Fund to implement it. To arrive at this conclusion, we analyse the challenges and build on current research on the optimal design of a fiscal fund. We characterise the fiscal policy, and the development of the Fund, together with the role and form that the Stability and Growth Pact can take in the new fiscal framework.
- “Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies” (with Gaetano Gaballo), Journal of Monetary Economics, (2021), 119, 1 -20.
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.
- “Commitment in Organisations and the Competition for Talent” (with Thomas Cooley and Vincenzo Quadrini), The Review of Economic Studies 87 (5), 2165–2204, October 2020.
We show that a change in organizational structure from partnerships to public companies—which weakens contractual commitment—can lead to higher investment in high return-and-risk activities, higher productivity (value added per employee) and greater income dispersion (inequality). These predictions are consistent with the observed evolution of the financial sector where the switch from partnerships to public companies has been especially important in the decades that preceded the 21st Century financial crisis.
We obtain a recursive formulation for a general class of optimization problems with forward-looking constraints which often arise in economic dynamic models, for example, in contracting problems with incentive constraints or in models of optimal policy.
- 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.
- “Money is an Experience Good: Competition and Trust in the Private Provision of Money” (with Juan Pablo Nicolini and Pedro Teles), Journal of Monetary Economics, 2012.
We extend the envelope theorem, the Euler equation, and the Bellman equation to dynamic constrained optimization problems where binding constraints can give rise to nondifferentiable value functions and multiplicity of Lagrange multipliers.
- “Competition, Human Capital and Income Inequality with Limited Commitment” (with Vincenzo Quadrini) Journal of Economic Theory, May 2011.
We develop a dynamic, general equilibrium model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up, affect the incentive to accumulate human capital. We show that a lack of contract enforceability amplifies the effect of barriers to competition on human capital accumulation.
- “Stable Sunspot Equilibria in a Cash-in-Advance Economy” (with G. Evans and S. Honkapohja) B.E. Journal of Macroeconomics (nominated for BEPress’s Arrow Prize for Senior Economists 2007 as the best paper by senior economists).
We analyze a monetary model with flexible labor supply, cash-inadvance constraints and seigniorage-financed government deficits.
- “Nominal Debt as a Burden to Monetary Policy” (with J. Diaz-Giménez, G. Giovannetti and P. Teles) Review of Economic Dynamics, 2008, 11, 3, 493-514.
We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed.
- “Strategic Delegation in Monetary Unions” (with V.V. Chari and L. Jones) The Manchester School, 2004.
In monetary unions, monetary policy is typically made by delegates of the member countries. This procedure raises the possibility of strategic delegation that countries may choose the types of delegates to influence outcomes in their favor. We show that without commitment in monetary policy, strategic delegation arises if and only if three conditions are met: shocks affecting individual countries are not perfectly correlated, risk-sharing across countries is imperfect, and the Phillips Curve is nonlinear.
- “Aggregate Consequences of Limited Contract Enforceability” (with Thomas Cooley and Vincenzo Quadrini) Journal of Political Economy, 2004 .
We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output.
- “Inside – Outside Money Competition” (with J.P.Nicolini and P.Teles) Journal of Monetary Economics, 50, November 2003.
We study how competition from privately supplied currency substitutes affects monetary equilibria. Whenever currency is inefficiently provided, inside money competition plays a disciplinary role by providing an upper bound on equilibrium inflation rates.
- “The Fiscal Theory of Money as an Unorthodox Financial Theory of the Firm”, Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, Palgrave, New York, 2001.