Research
Working Papers
This paper examines how aggregate shocks affect production networks through a model where firms balance cost and risk in supplier choices. Global uncertainty reorganizes the network, changing shock transmission and GDP growth. The impact of reorganization on value added depends on a firm's position in the network: during crises, producers shift away from central sectors as these become riskier and their growth slows. The model attributes 16-20\% of GDP growth during the financial crisis to network reorganization. A policy counterfactual shows lower trade costs boost expected consumption by reallocating the network to more productive suppliers but raise aggregate risk for many countries.
The Micro Effects of Aggregate Shocks in Endogenous Trade Networks
(Job Market Paper)
This paper revisits the quantitative importance of self-fulfilling risk in the 2010–2012 European debt crisis. While a benchmark study by Bocola, Dovis (2019) finds a limited role using a Cole-Kehoe framework, we use a Calvo-style sovereign debt model. In our setting, a rollover crisis can occur without a government default—a mechanism more consistent with the observation that countries like Italy never fully lost market access. Calibrating our model to pre-crisis Italy, we decompose observed sovereign spreads. In sharp contrast to previous findings, our decomposition attributes a substantially larger role to shifts in investor beliefs, demonstrating that the modeling of the crisis mechanism is quantitatively critical.
Co-authors: Teerat Wongrattanapiboon
Optimal Maturity and Self-Fulfilling Crises
This paper analyzes how a government can use reserves to prevent a self-fulfilling crisis, as described in Lorenzoni and Werning (2019), where confidence-driven fluctuations affect bond prices. We propose a three-period model in which the government follows a fixed fiscal surplus rule and chooses the optimal reserve accumulation policy.
Our analysis reveals a new mechanism for which debt-financed reserves provide insurance against self-fulfilling crises in the presence of long-term bonds. We also present empirical evidence that governments tend to accumulate reserves during periods of exceptionally high spreads and show how our theoretical framework could help explain this empirical pattern.
Co-authors: Teerat Wongrattanapiboon
Debt Sustainability, Confidence Risk and International Reserves
This paper explores the implications of political-economy frictions for the dynamics of credit booms and the design of macroprudential policy. We present an open-economy model of financial crises with political turnover, where parties differ in their inclination to regulate financial markets. We show that when the more responsible party is in office, it implements regulations that exceed those that would be optimal absent political frictions. We draw lessons for the empirical literature on macroprudential effectiveness and show that accounting for political frictions helps reconcile theory with mixed empirical findings.
Co-Authors: Javier Bianchi - Cesar Sosa-Padilla
The Political Economy of Credit Booms and Macroprudential Policy
This paper examines the relationship between the currency composition and bondholder composition of sovereign debt, focusing on the government's incentives to issue debt denominated in local currency (LC) or foreign currency (FC). We introduce a framework that analyzes the trade-offs governments face when domestic and foreign demand for bonds respond differently to policy changes. The main result is that the government considers the effect on the composition of the bondholders when choosing the currency of its debt. Domestic investors' demand for LC bonds is higher due to the insurance they provide against distortionary taxes.
Co-authors: Leonardo Barreto Teresa Balestrini
Sovereign Debt, Currency Composition, and Financial Repression
This paper shows the vulnerability of the government to face a self-fulling crisis characterized by low domestic demand for government bonds associated with a high probability of default. Investor expectations of low domestic demand increase foreign debt and default probability. High default risk decreases bond prices and prompts higher taxes or reduced government transfers. Consequently, domestic demand is low, confirming the initial expectation. I introduce a version of a sovereign debt model with domestic and foreign investors, analyze conditions for multiple equilibria, and establish that the government must announce a sequence of subsidies contingent on aggregate demand to restore efficiency.
Domestic Debt and Self-Fulfilling Crises
This paper studies the link between sovereign default risk and public investment in climate adaptation, which reduces the economic cost of natural disasters. We develop a sovereign default model that incorporates adaptation investment and quantify its effects on bond prices and fiscal policy. Our empirical analysis shows that countries with higher adaptation levels, measured by the ND-GAIN index, experience lower economic losses from disasters and reduced sovereign risk. We demonstrate that adaptation public investment is inefficiently low due to lack of commitment . Finally, we analyze how sovereign risk influences adaptation policy
Co-Authors: Federico Dueñas - Oscar M. Valencia
Natural Disasters, Adaptation, and Default Risk
We examine self-fulfilling debt crises in a model of a monetary union with nominal rigidities. In the absence of policy commitment, the model features multiple equilibria—one with low interest rates and another with high rates, echoing Calvo (1998). We show that a credible commitment to an expansionary monetary policy can eliminate the high-rate equilibrium and avert self-fulfilling crises. Finally, the risk of confidence crises can lead to endogenous fragmentation within the union, as interest-rate spreads diverge between countries. This asymmetry creates a trade-off for monetary policy, which must balance the differing conditions faced by high- and low-spread member states.
Co-Authors: Javier Bianchi
Sovereign Debt Crises and Monetary Policy (Draft Available Upon Request)
Sovereign Risk and Production Networks