Research interests: International Macroeconomics, Sovereign Debt, Financial Frictions

Publications (including Forthcoming)

External Imbalances, Gross Capital Flows and Sovereign Debt Crises (Journal of the European Economic Association, Volume 19, Issue 1, February 2021, Pages 347–402)


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 assets issued within the union 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 the widening of gross external positions in the euro area by inducing countries with high income and external assets to engage in intermediation of gross capital flows.

Household Heterogeneity and the Transmission of Foreign Shocks (with Kurt Mitman and Federica Romei), Journal of International Economics

Volume 124, May 2020, 103303. [NBER Working Paper No. 26402]

We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations

Working Papers

Sovereign Risk Matters: The Effects of Endogenous Default Risk on the Time-Varying Volatility of Interest Rate Spreads (with Enrico Mallucci)

Revisions submitted, Journal of International Economics [pdf]. Previous draft available as FRB International Finance Discussion Paper No. 1276.

Abstract: Emerging markets’ interest rate spreads display substantial time-varying volatility. We show that models with endogenous sovereign default risk à la Eaton and Gersovitz (1981) can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, theses models feature a key non-linearity that allows them to replicate the stochastic volatility of interest rate spreads and its comovement with other important economic variables. Volatility correlates positively with the level of the spreads and the trade balance, negatively with output and consumption. Hence, sovereign default models endogenize the stochastic volatility of interest rates observed in emerging market economies.

Why Does Capital Flow from Equal to Unequal Countries? (with Kurt Mitman and Federica Romei) [CEPR DP15647]

Abstract: Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows.

Sovereign Default in a Monetary Union (with Federica Romei) [pdf]

Abstract: In the aftermath of the global financial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.

Sovereign Debt Crises, Fiscal Austerity and Corporate Default (revisions requested, Review of Economic Dynamics)


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.

Avoiding Sovereign Default Contagion: A Normative Analysis (with Enrico Mallucci)

[International Finance Discussion Paper 1275]

Abstract: Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard and reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be replicated in a decentralized setting with Pigouvian taxes on debt.