Research
Working Papers
This paper investigates the implications of considering markets with heterogeneous investors on the vulnerability to self-fulfilling debt crises. I study a workhorse Eaton-Gersovitz model of sovereign debt. I depart from the literature by considering a market populated by domestic and international investors and establishing conditions under which multiple equilibria can arise. In the model, bondholders' composition changes the risk of default because the government is less likely to default on domestic investors. Also, the government responds to low prices of bonds by increasing taxes, which reduces the domestic demand for bonds. Those two factors imply that multiplicity arises because of a reinforcement loop between prices and the bondholder's composition of sovereign debt. Multiple equilibria's presence underscores financial regulation's importance in mitigating coordination costs and promoting overall welfare.
Self-fulfilling Debt Crisis Due to Investor Heterogeneity
This paper investigates the implications of political economy frictions for the dynamics of financial cycles and macroprudential policy. We extend a workhorse open-economy model of financial crises with turnover of political parties that vary in their propensities to regulate financial markets. We show that when a party more prone to regulation is in power, it imposes more stringent regulations beyond what would be optimal in the absence of political economy frictions. We demonstrate that incorporating political economy considerations can mitigate the endogeneity bias observed in empirical studies of macroprudential policy, thereby addressing the previous lack of significant effects found in such analyses.
Co-Authors: Javier Bianchi Cesar Sosa-Padilla
The Political Economy of Credit Booms and Macroprudential Policy
This paper analyzes how the government can use reserves to prevent a self-fulfilling
crisis in which expectations about high future borrowing trigger low current prices and
high debt. We propose a three-period model in which the government has a fixed fiscal
surplus. The government’s only choice is the composition of the foreign portfolio of
debt and reserves. Our analysis reveals that debt-financed reserves provide insurance
against the risk of future self-fulfilling crises and increase current prices in the presence
of long-term bonds. The model allows us to rationalize why some European countries
accumulate reserves during sovereign debt crises in 2012.
Co-Author: Teerat Wongrattanapiboon
International Reserves and Self-Fulfilling Crises
This paper explores 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 that governments face when domestic and foreign demand for bonds react differently to policy changes. The main result is that the government considers the effect on bondholder composition when choosing the currency of its debt. Domestic investors' demand for LC bonds is higher due to the insurance provided against distortionary taxes.
Co-authors: Leonardo Barreto Teresa Balestrini
Domestic Investors and the Currency Composition of Sovereign Debt
A Quantitative Analysis of International Reserves and Self-Fulfilling Crises (with Teerat Wongrattanapiboon)
Production Networks and International Comovement
Sovereing Debt Crises and Monetary Policy (with Javier Bianchi)