Bank Capital Buffers in a Dynamic Model (joint with Alex Michaelides and Spyros Pagratis) Financial Management (2020), Vol 49(2),
Published Version (FM), Bundesbank Discussion Paper No 51/2018Household Search and the Aggregate Labor Market (joint with Rigas Oikonomou) Review of Economic Studies (2017), Vol 84(4)
Published Version (RES), Unemployment Insurance Appendix, Data and Numerical AppendixThe Rise of the Added Worker Effect (joint with Rigas Oikonomou) Economics Letters (2016), Vol 143
Published Version (EL), Online Appendix: Data and Proofs, Bundesbank Discussion Paper No 10/2016Entrepreneurship, Bankruptcy and Debt Portfolios (joint with Giacomo Rodano) Journal of Monetary Economics (2015), Vol 76
Published Version (JME), Bundesbank Discussion Paper No 28/2015The (Un-) importance of Chapter 7 wealth exemption levels Journal of Economic Dynamics and Control (2014), Vol 38
Published Version (JEDC), Working PaperDividend Restriction with Heterogenous Banks (joint with Angélica Dominguez-Cardoza)
Wholesale funding market freezes in a dynamic banking model (joint with Alex Michaelides and Spyros Pagratis)
The long and short of financing government spending (joint with Rigas Oikonomou and Romanos Priftis) R&R Review of Economic Studies — New version coming soon
We study optimal policy in an environment where short-term government bonds provide liquidity/safety to the private sector. In our heterogeneous‑agent New Keynesian model, short-term bonds fulfill the demand of households for precautionary savings, which implies a lower return in equilibrium. Households do not require full compensation for inflation to hold this debt, and its real return does not align with consumption growth. We show that the Ramsey-optimal policy features a positive, time-varying inflation target. The government also finds it optimal to introduce volatility in (labor) taxes to depress the real return on newly issued short-term bonds, operating through a novel intertemporal tax‑distortion channel. When the government can issue both short- and long-term bonds, short debt is used as a shock absorber, similar to long-term debt. Quantitative simulations indicate that the resulting optimal debt maturity structure closely resembles that observed in U.S. data. Finally, we show that equilibrium multiplicity is an inherent feature of this environment. We develop a novel computational algorithm that robustly handles equilibrium multiplicity and enables a full characterization of the optimal policy.
Expectations are central for housing decisions and heterogeneity in expectations is a robust feature of survey data. We study the implications of heterogeneity in house price growth expectations for the level of house prices. We feed the joint empirical distributions of income, wealth and expectations into a calibrated heterogeneous agents housing model. We find that eliminating heterogeneity in house price growth expectations would raise average house prices and amplify house price fluctuations thereby reducing the fit of the model. Without heterogeneity, average house prices would be about 11 percent higher and the boom-bust cycle would be about 41 percent larger.
Household Job Search: From the 1980s to the 2000s (and beyond) (joint with Rigas Oikonomou and Francesco Pascucci) Reject & Resubmit International Economic Review
We investigate the impact of structural changes that occurred in the US labour market since the 1980s for the labour supply/job search behavior of married couples, exploring a rich Bewley-Aiyagari model with dual earner households, on-the-job-search and endogenous
entry into the labour force. We fit our model to a large set of moments on the labour market of married individuals, including employment/participation rates, wage distributions and estimates of the added worker effect which captures the sensitivity of married women’s reservation wages to their spouse’s employment status. We derive three main findings: i) Female labour supply behavior has changed considerably over time and female preferences over participation (employment and unemployment) became more aligned with male preferences. ii) Despite the shifts in labor supply behavior, most of the increase in female employment can be attributed to demand-side factors, such as changes in the gender wage gap and labor market frictions. iii) The trend in the added worker effect was not driven by ’income maximization’, whereby household members alternate employment to climb the wage ladder. Instead, the structural transformation of the US labour market has resulted in a higher insurance value of female labour supply, making households more likely to focus on the extensive margin. We discuss the relevance of these findings for recent strands of the quantitative macroeconomics literature
Debt Maturity and Government Spending Multipliers (joint with Morteza Ghomi, Rigas Oikonomou and Romanos Priftis)
(formerly circulated as Fiscal Multipliers and the Maturity Financing of Government Spending Shocks)
Government spending effectiveness depends critically on how it is financed. Using state-dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. To rationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets. Short assets provide liquidity/safety services; households can (more readily) use them to cover sudden idiosyncratic spending needs. An increase in the supply of these assets, through a short-term debt-financed government expenditure shock, boosts private consumption. We first show this mechanism analytically in a simplified model, and then quantify it in a carefully calibrated New Keynesian model. We find that fiscal multipliers differ substantially across financing modes, with short-term-financed shocks typically exceeding unity while long-term-financed shocks typically fall below unity. We show these differences persist across monetary and fiscal policy regimes, with important implications for optimal debt management and stimulus design.
Sovereign risk and bank fragility (joint with Kartik Anand)
We develop a mode of bank risk-taking with strategic sovereign default. Domestic banks invest in real projects and purchase government bonds. While increased bond purchases crowd out profitable investments, they improve the government's incentives to repay, which lowers its borrowing costs. But banks' holdings of government bonds are inefficient since they do not account for how their portfolio choices influence the government's incentive to default. In particular, when the government debt level is high, banks hold too few government bonds. In such situations, introducing regulations to limit banks' holdings of domestic government bonds would be detrimental to welfare.
Changes in education, wage inequality and working hours over time (joint with Thomas Davoine)
The US skill premium and college enrollment have increased substantially over the past few decades. In addition, while low-wage earners worked more than high-wage earners in 1970, the opposite was true in 2000. We show that a parsimonious neoclassical model featuring skill-biased technical change, endogenous education and labor supply decisions can explain the change in the US college education rate between 1967 and 2000 as well as the trend in the wage-hours correlation. Moreover, we show analytically and quantitatively that endogenous labor supply is important. Assuming constant hours significantly biases the estimates of the effects of skill-biased technological progress on college enrollment and the skill premium. Further, we find that limiting the maximum number of hours someone can work lowers welfare for almost all generations. Since it increases the skill premium, the welfare loss is most severe for the low-skilled, reaching almost one percent
of life-time consumption.