Research Articles and Working Papers
"Solving Heterogeneous-Agent Models around the Ergodic Steady-State"
This paper develops a novel local method to solve recursive stochastic macroeconomic models as an approximation around the ergodic mean of the distribution of the variables. In contrast to standard local approaches, agents fully take risk into account up to a first-order, which helps to solve several well-known limitations of previous algorithms (need of a well-defined deterministic steady state, certainty-equivalence up to a first-order, inability to deal with incomplete markets). The method is very fast, easy to implement, and it provides an excellent degree of accuracy as measured by the Euler equation errors. We introduce the method by solving two well-known examples of incomplete-markets models in the literature: the stochastic growth model with heterogeneous agents and aggregate risk, and the New Keynesian model with heterogeneous agents (HANK).
"A Welfare State-based Fiscal Multiplier"
Empirical evidence indicates that fiscal multipliers were significantly larger during the austerity period of 2010-13 than in previous times. A common explanation is that new-Keynesian models can deliver a larger-than-usual spending multiplier when the zero lower bound binds. Here we argue that these theories cannot explain the evidence if the combination of policy-makers committing to a sizable reduction of public debt and low output growth expectations lead agents to believe that austerity measures were permanent. Instead, we explain the evidence in the context of a new-Keynesian model with incomplete markets and heterogeneous households where a permanent cut of welfare state spending at the zero lower bound increases incentives to save for precautionary reasons, thus leading to a Paradox-of-Thrift type of recession. We also provide new empirical evidence consistent with the model, as we find that the welfare state spending multiplier was significantly larger than the non-welfare and tax multipliers for advanced countries engaging in fiscal adjustments over this time period.
"The Great Recession: Divide between Integrated and Less Integrated Countries" (with Eric van Wincoop and Gang Zhang) . IMF Economic Review 64.1 (2016): 134-176.
No robust relationship has been found between the decline in growth of countries during the Great Recession and their level of trade or financial integration. Here we confirm the absence of such a monotonic relationship, but document instead a strong discontinuous relationship. Countries whose level of economic integration (trade and finance) was above a certain cutoff saw a much larger drop in growth than less integrated countries, a finding that is robust to a wide variety of controls. We argue that standard models based on transmission of exogenous shocks across countries cannot explain these facts. Instead we explain the evidence in the context of a multi-country model with business cycle panics that are endogenously coordinated across countries.