Working Papers

• Fiscal Capacity, Foreign Reserves, and Lender of Last Resort
  New Draft Available! Download here the latest version.

  I develop a theory of public liquidity, fiscal capacity —the ability to collect taxes effectively— and why governments accumulate foreign reserves for liquidity purposes. I construct a liquidity framework of an economy that borrows from international markets and features a government with heterogeneous levels of fiscal capacity. Since liquidity crises arise from binding financial frictions, fiscal capacity determines the effectiveness of ex post public policies. When fiscal capacity is high, the government eliminates liquidity crises by overcoming financial frictions. When fiscal capacity is low, it cannot, forcing it to rely on second-best policies such as foreign reserves accumulation. A key mechanism behind these results is a crowding-out effect: when fiscal capacity is underdeveloped, public liquidity provision displaces private liquidity rather than expanding aggregate liquidity. In equilibrium, governments with low fiscal capacity may accumulate reserves depending on whether the expected cost of a crisis outweighs the increasing cost of reserves accumulation. I empirically test four theoretical implications using data from 44 economies between 1991 and 2019.

  Previous Presentations: Banco Central de Chile; 2021 Money, Macro and Finance Society (Annual Conference); 2021 LACEA/LAMES (Annual Meeting); 2021 Southern Economic Association (Annual Meeting); 2021 Bolivian Conference on Development Economics; 2022 AEA/ASSA Poster Session, 2023 SED Annual Meetings, Public Economic Theory 2024.

• Capital Controls on Outflows: New Evidence and Theoretical Framework
  with Roberto Chang (Rutgers University, NBER), and Andres Fernandez (IMF)
  NBER WP No. 32877 and IMF WP/24/164
  Download paper here.

  We study capital controls on outflows (CCOs) in situations of macroeconomic and financial distress. We present novel empirical evidence indicating that CCO implementation is associated with crises and declines in GDP growth. We then develop a theoretical framework that is consistent with such empirical findings and also yields policy and welfare lessons. The theory features costly coordination failures by foreign investors which can sometimes be avoided by suitably tailored CCOs. The benefits of CCOs as coordination devices can make them optimal even if CCOs entail deadweight losses; if the latter are large, however, CCOs are detrimental for welfare. We show that optimal CCOs can suffer from time inconsistency, and also how political opportunism may limit CCO policy. Hence government credibility and reputation building emerge as critical for

  the successful implementation of CCOs.

• Rules versus Discretion: Decoding FOMC Policy Deliberations
  with Michael D. Bordo (Rutgers University) and Klodiana Istrefi (Banque de France)
  NBER WP No. 33262
  Download paper here.

  This study provides evidence on the usage and preferences of Federal Reserve’s Federal Open Market Committee (FOMC) regarding the balance between rules and discretion in policy decisions. Analyzing FOMC transcripts over 40 years, we find that while Discretion has been a consistent feature in the language of the FOMC, the use of the language of Rules surged notably in the mid-1990s, aligning with theoretical advancements in monetary policy. We identify that a rise in Discretion terminology occurs during economic downturns and periods of heightened uncertainty. In contrast, a rise in the language of Rules is supported by higher references to terms such as “credibility” and “commitment,” and is more prevalent among hawkish FOMC members. Our findings link the increased use of the language of Rules (Discretion) language to tighter (easier)

  monetary policy, revealing a significant role of this debate in shaping policy outcomes, in particular periods.

• Pandemics, Incentives, and Economic Policy: A Dynamic Model
  with Roberto Chang (Rutgers University, NBER) and Andrés Velasco (LSE).
  NBER WP No. 28636. CEPR DP. 15977.
  Download paper here while codes are available here.

  The advent of a pandemic is an exogenous shock, but the dynamics of contagion are very much endogenous --and depend on choices that individuals make in response to incentives. In such an episode, economic policy can make a difference not just by alleviating economic losses but also via incentives that affect the trajectory of the pandemic itself. We develop this idea in a dynamic equilibrium model of an economy subject to a pandemic. Just as in conventional SIR models, infection rates depend on how much time people spend at home versus working outside the home. But in our model, whether to go out to work is a decision made by individuals who trade-off higher pay from working outside the home today versus a higher risk of infection and expected future economic and health-related losses. As a result, pandemic dynamics depend on factors that have no relevance in conventional models. In particular, expectations and forward-looking behavior are crucial and can result in multiplicity of equilibria with different levels of economic activity, infection, and deaths. The analysis yields novel policy lessons. For example, incentives embedded in a fiscal package resembling the U.S. CARES Act can result in two waves of infection.

Work in Progress

• Stock versus Flow? Foreign reserves and the Global Financial Crisis

  Central banks in emerging markets argue that they accumulate foreign reserves, in part, to meet balance of payments financing needs. However, this explanation is at odds with several countries' reluctance to deplete their foreign reserves stock during acute liquidity episodes. I argue that reserves not only provide a country with liquidity services, but they also increase a country's solvency. Thus, facing a liquidity shock, a monetary authority will only sell foreign reserves if by doing so, it doesn't jeopardize its’ solvency. I provide empirical evidence for 38 countries that solvency concerns, measured by external balance sheet exposure, drove the depletion of foreign reserves during the Global Financial Crisis.

• Liquidity Regulation: The last taxi at the station?
  with Rhiannon Sowerbutts (Bank of England)

  Usability of liquidity requirements, such as the Liquidity Coverage Ratio, during periods of stress is yet to be tested. Using a unique UK bank level dataset between 2011 and 2014, we take advantage of increased uncertainty caused by the European sovereign debt crisis and a back then active liquidity regulation in the UK, to provide empirical evidence to Goodhart's last taxi at the station puzzle. Five different empirical results suggest that banks during this stress period in the UK didn't consider their liquidity buffer to be completely usable. This evidence strengthens concerns on whether liquidity requirements make banks more resilient.

• Foreign Reserves Accumulation
  with Julián Fernández (Copenhagen Business School)