Assessing the fundamental value of a wide range of asset-backed securities is costly. As a result, these assets can become information insensitive, which allows them to be used as collateral in credit transactions. In this paper, we show that while it is true that information-insensitive assets can play a liquidity role, the fact that they play this role reinforces their information-insensitivity. This implies that the availability of alternative ways of financing can harm the liquidity role of assets, even if these alternatives are costly and not used in equilibrium. The reason is that such options raise the asset's sensitivity to information by increasing the relative importance of their fundamental value vis-a-vis their role as collateral.

We present an aggregation theory for the Social Welfare Function (SWF). Agents have heterogeneous perceptions of how the government should value the welfare of other agents, which results in so-called Individual Welfare Functions (IWFs) that are possibly time-varying and shaped by the individuals’ life experiences. The aggregation of these IWFs, possibly weighted by political weights, yields a time-invariant SWF. We develop an estimation strategy to identify the SWF and IWFs based on the observed fiscal system and inequality in France and in the United-States. Our findings indicate that the SWF significantly shapes the observed fiscal system and equilibrium allocation.

By setting interest rates, monetary policy affects the cost of carrying inventories – giving rise to a “cost-of-carry channel” of monetary policy transmission. Via a simple model, we show that higher inventory carrying costs drive firms, especially those holding larger inventories, to cut their prices. We test this hypothesis using data from the U.S. goods, housing, and oil markets – finding robust evidence supporting the cost-of-carry channel. We then introduce this channel into a New Keynesian setup and show that it makes optimal policy more focused on inflation stabilization when inventories are more plentiful – the reason being that the central bank faces a more favorable sacrifice ratio in such an environment.

This paper examines the relationship between terms-of-trade shocks and sovereign debt defaults in import-dependent developing economies. While existing literature highlights a negative relationship between terms-of-trade shocks and defaults for commodity exporters, we find the opposite for commodity importers, where rising import prices can worsen debt distress and increase default risks. We incorporate trade into a sovereign default model to explore this interaction, finding that countries with a high import share are at risk of default when facing rising import prices and deteriorating terms of trade. Additionally, heavily indebted nations risk default even with modest price increases. Our empirical analysis focuses on food as a key terms-of-trade shock, given its limited substitutability with domestic production. Using unexpected harvest shocks as an instrument to isolate food price fluctuations, we focus on Ghana, which defaulted on its external debt in 2022. We find that unexpected food price increases drive up import costs, inflation, trade imbalances, and debt. These results underscore the importance of consumption composition in assessing trade shock impacts.

The economic landscape post-COVID-19 and the energy crisis has underscored the critical role of government intervention in cushioning against shocks and aiding economic recovery. Focusing on the United Kingdom, we analyze optimal fiscal and monetary policies in scenarios marked by differing debt-to-GDP ratios, notably comparing the low ratio of 2007 to the high ratio of 2021. By exploring dynamic responses to shocks and the utilization of policy tools like taxation, public debt, and inflation, we offer insights into effective strategies for navigating economic uncertainties. Specifically, we highlight how higher debt-to-GDP ratios necessitate nuanced approaches to managing public debt in response to shocks. Additionally, we find that in the absence of fiscal tools, inflation can serve as an effective adjustment mechanism, suggesting that accepting moderate inflation may be optimal in certain scenarios. We use an extended Lagrangian approach for analytical results and a truncated representation of incomplete markets model for quantitative findings, offering a manageable framework for studying policy dynamics in response to economic shocks.

We estimate a production function model of aggregate economic growth by including two important dimensions of human capital - education and health. Our main intention was to study the importance of health in explaining economic growth in different countries and in different regions. In order to achieve this ambition we divided the countries into four regions: Africa Sub Saharan; Latin America and Caribbean; South Asia, Middle East, North Africa, East Asia and Pacific; and Europe, Central Asia and North America. Our findings suggest that health has a positive and statistically significant effect on economic growth. For the whole world, it suggests that an increase in one-year life expectancy leads to a growth of output per capita in the countries of around 1.36% when we control for the worldwide technological frontier and about 2.10% when we do not control for this fixed effect in time. The results we found suggest that the omission of health produces a misspecification bias of the coefficients of the production function. In most part of the empirical exercises we did, we found that the effect of schooling was also positive and statistically significant, even when we controlled for health capital. By analyzing the importance of these two dimensions of human capital in the different regions, we found that education is more important in Latin America and African Sub-Saharan countries than in countries from the region Europe, Central Asia, and North America, whereas life expectancy is more important in explaining the growth in this last region. Our results indicate that the role of different forms of capital in the growth process change as income rise.