Working Papers

 

"The Role of International Reserves in Sovereign Debt Restructuring under Fiscal Adjustment", 2016
Current Version [PDF]

Abstract:
Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing in- terest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include dis- tortionary taxation and debt restructuring. This paper shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is dis- tortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero.

 

"Labor Market Distortions under International Financial Crisis", 2016
Current Version [PDF]

Abstract:
Risk of sovereign debt default has frequently affected emerging market and developed economies. Such financial crisis are often accompanied with severe declines of employment that are hard to justify using a standard dynamic stochastic model. In this paper, I document that a labor wedge deteriorates substantially around swift reversals of current accounts or default episodes. I propose and evaluate two different explanations for these movements by linking the wedges to changes in labor taxes and in the cost of working capital. With these two features included, a dynamic model of equilibrium default is able to replicate the behavior of the labor wedge observed in the data around financial crisis. In the model, higher interest rates are propagated into larger costs of hiring labor through the presence of working capital. As an economy is hit with a stream of bad productivity shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm demand for labor and generates a labor wedge. A similar effect is obtained with a counter-cyclical tax rate policy. The model is used to shed light on the recent events of the Euro Area debt crisis and in particular of the Greek default event.

 

"Noisy information About the Trend and Sovereign Default Risk", 2015
[under revision]

Abstract:
Emerging markets economies are subject to substantial volatility in trend growth motivated by frequent policy reversals. Also, agents in emerging markets face higher uncertainty due to weak institutions and political instability. Motivated by these observations, we build a dynamic stochastic model in which agents cannot perfectly distinguish between the trend and transient component of observed endowments, but can only learn about them by solving a signal-extration problem. We extend this model to include endogenous default risk and conlcude that, for similar endowment and debt levels, higher uncertainty about the trend implies larger default risk. This result is consistent with the documented empirical observation that interest rate spreads are, on average, larger in periods that surround election periods - associated with higher uncertanty - as well with other empirical regularities regarding emerging markets. Furthermore, we use the model to shed light on the recent events that characterized the greek sovereign debt crisis.

 

"Heterogeneous Investment Dynamics of Manufacturing Greek Firms", 2017 joint with Alexandros Fakos
[under revision]