Research

Working Papers

The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk

[paper | slides] IMF Working Paper No. 2020/293 Submitted

Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt

with Francisco Roch [paper | slides] IMF Working Paper No. 2021/76 Revise-and-resubmit at JPE: Macro

Coverage: Foco Económico (in Spanish), LSE Business Review, IMF Research Perspectives

Credibility Dynamics and Inflation Expectations

with Rumen Kostadinov [paper | slides] IMF Working Paper No. 20/85 Submitted

Distributional Effects in Sovereign Debt Policy

with Juan Morelli [paper | slides]

Publications

Sovereign Debt

with Leonardo Martinez, Francisco Roch, and Jeromin Zettelmeyer, forthcoming in The Research Handbook of Financial Markets, 2022. [paper | slides] IMF Working Paper No. 2022/122

This paper surveys the literature on sovereign debt from the perspective of understanding how sovereign debt differs from privately issued debt, and why sovereign debt is deemed safe in some countries but risky in others. The answers relate to the unique power of the sovereign. Control over its territory and most of its assets can make debt enforcement difficult, while the power to tax serves as a substitute for collateral, making debt relatively safe. The paper discusses debt contracts and the sovereign debt market, sovereign debt restructurings, and the empirical and theoretical literatures on the costs and causes of defaults. It describes the adverse impact of sovereign default risk on the issuing countries and what explains this impact. The survey concludes with a discussion of policy options to reduce sovereign risk, including fiscal frameworks that act as commitment devices, state-contingent debt, and independent and credible monetary policy.

On the Optimal Speed of Sovereign Deleveraging with Precautionary Savings

with Thomas Philippon, 2018. IMF Economic Review, vol. 66(2), pp. 375–413, June. [paper | slides]

We study the interaction between sovereign risk and aggregate demand driven by the endogenous response of savers to sovereign risk. We obtain two main results. First, this new sovereign risk / aggregate demand channel creates a tradeoff between the recessionary impact of fiscal consolidation and the risk of a future sovereign debt crisis. Risk aversion has a large impact on output losses and on welfare when sovereign debt is risky. Second, we find that savers and borrowers disagree about the optimal path of sovereign deleveraging. The sovereign risk channel can therefore explain some of the rise in political disagreement about fiscal policy. Using a version of the model calibrated to the Eurozone crisis, we find that sovereign risk justifies starting to deleverage about two years after the beginning of the recession. We also find that, after 2012, the channel was weakened so that active deleveraging in a recession is no longer justified.

Markups Under Uncertainty: Variations on Price Decisions in High Inflation

with Daniel Heymann, in Macroeconomics and Development: Roberto Frenkel and the Economics of Latin America, New York: Columbia University Press. 2016

We revisit some of the contributions of Roberto Frenkel's (1979) classic paper in a modern setting. We are interested in situations in which higher uncertainty about future inflation induces firms to increase markups. It turns out that, although a simple CES model predicts the opposite, markups do increase in response to uncertainty when minimum (or maximum) capacity and liquidity constraints are considered.

Work in Progress

Reserve Accumulation and the Currency Composition of Sovereign Debt

with César Sosa-Padilla [paper | slides]

On the Macroeconomic Implications of a Large Diaspora

with Gabriel di Bella [paper | slides]

Capital Controls and Misallocation

with Lian Allub, Nicolás Aragón, and Hernán Seoane [paper | slides]

Sudden Stops and Where to Find Them

with Nicolás Aragón and Hernán Seoane [paper | slides]

On the Shortcomings of Direct Foreign Exchange Interventions

with Gustavo Adler [paper | slides]