Research interests: International Macroeconomics, Sovereign Debt, Financial Frictions

External Imbalances, Gross Capital Flows and Sovereign Debt Crises (submitted)

Abstract: The experience of the European monetary union has been characterized by current account imbalances, widening gross external positions and a severe sovereign debt crisis. I argue that institutional features of the European Economic and Monetary Union have contributed to all three. I show in a model that subsidies on holdings of euro-denominated assets contribute to current account imbalances, to gross capital flows and to the severity of the crisis. In a quantitative model with heterogeneous countries, I show that the subsidies account for a substantial fraction of net and gross capital flows in the euro area.

Sovereign Debt Crises, Fiscal Austerity and Corporate Default 

Abstract: During the Eurozone debt crisis, Italy suffered from an increase in sovereign borrowing costs and from a reduction in credit to firms. What is the link between sovereign default risk and financial frictions faced by firms? To address this question, I build a model of endogenous sovereign default where firms issue risky debt and fiscal policy is distortionary. First, I show that a sovereign debt crisis causes a reduction of credit to firms, occurring through the channel of domestic fiscal policy. A fiscal tightening in the country in crisis causes a reduction of firms' profits and an increase in their default risk. Second, I show that firms are heterogeneous in the degree to which they are affected by a crisis: Firms in the non-tradable sector are more vulnerable, as demand for their output falls in a crisis. Finally, as observed in Italy, a contraction in economic activity occurs during the crisis.

Endogenous Volatility in Sovereign Interest Rates: The Role of Default Risk 

Abstract:  What are the determinants of time-varying interest rate volatility on emerging markets' external debt? I show that a baseline model of endogenous sovereign default quantitatively replicates the pattern of time-varying volatility observed in the data. The model features a key non-linearity in the policy function for the interest rate on external debt. In the absence of shocks to the second moment of stochastic variables, the model generates a path of interest rates that is more volatile in bad times, when output is low and debt is high.


Cross-borrower spillovers in the market for sovereign debt