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.

Working Papers

We present a Bewley-type theory of the Social Welfare Function (SWF): agents have heterogeneous Individual Welfare Functions (or political views) shaped by their life experiences, and the planner then constructs the SWF by aggregating these individual views. We then consider a Ramsey problem in a heterogeneous-agent economy to impose restrictions on the SWF. Next, we use the inverse optimal approach for the model to replicate a chosen fiscal system and allocation. We apply our methodology to France and the United States. France’s SWF places greater emphasis on individuals with lower incomes, contrasting with the United States’ SWF, which assigns greater weight to individuals with higher incomes. Finally, we simulate the fiscal system of the United States under the assumption of adopting the French SWF. Our findings indicate that the SWF significantly shapes the optimal steady-state fiscal system and equilibrium inequality.

This paper studies how food crises and sovereign debt defaults are connected in developing economies reliant on food imports. Fluctuations in food prices can worsen these economies’ debt situations, leading to defaults. To examine this, we use unexpected harvest shocks as an instrument to isolate the impact of food price changes. Focusing on Ghana, which defaulted in 2022, we find that positive price shocks raise import prices, inflation, trade imbalances, currency depreciation, and external debt. We use a small open economy model to clarify this interplay. The results indicate that even countries reliant on food imports with low debt can default due to high food import prices. On the other hand, highly indebted nations can default even with minor price increases. These findings emphasize the need for urgent international aid to mitigate the combined effects of food and debt crises, especially for countries heavily reliant on commodity imports. 

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.

Work in Progress

Optimal Monetary and Fiscal Policy in a World of Supply Shocks

A HANK model for France

Other Articles

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.