I am a Ph.D. student specialized in international macroeconomics and finance. My research focuses on the interaction of sovereign default risk and banking fragility when governments provide guarantees to bank liabilities. I also study optimal policy response to external shocks when countries are prone to sudden stops, amongst other policy-oriented topics.
Abstract: In the classical theory of bank runs, the government effectively rules out speculative equilibria by providing debt guarantees to bank creditors, and this policy does not generate fiscal costs in equilibrium. Nevertheless, during the recent European debt crisis, the provision of guarantees not only was unsuccessful in eliminating bank runs, it was also responsible for the transmission of default risk between the banking sector and sovereign governments. We study the interaction between banks and the government when the latter guarantees to the formers' debt, but it lacks commitment to honor its financial obligations. We model a small open economy that is comprised of continua of bankers and households, and a benevolent government. Bankers face a liquidity mismatch in their balance sheet that opens the door to speculative runs from foreign lenders. We find that the combination of bank net worth and government debt, along with the size of the bank balance sheets relative to the fiscal capacity of the government, determines whether guarantees are effective or not to rule out speculative equilibria. A strategic complementarity between bank and government debt arises through the price of bonds, which leads to multiplicity of equilibria. We show that redistributing wealth from the government to the banks---namely, recapitalizing the financial sector---is successful in ruling out bank run equilibria and it is welfare improving under certain conditions. Imposing debt limits to the banks reduces the degree of complementarities between banks and it constrains the region of runs, but it is likely to reduce bankers' welfare.
“Managing Capital Flows in the Presence of External Risks: an Overborrowing Approach” with Ricardo Reyes-Heroles
Abstract: The cross-country capital flows that originated from the recent global financial crisis have sparked a renewed interest from policy makers in the use of macroprudential instruments to prevent and reduce the effects of sudden capital reversals. The recent theoretical studies of macroprudential policy in borrowing-constrained economies have not taken into account the implications of external uncertainty for the design of optimal policy, something that deems very relevant given the high volatility in international financial markets. In this paper, we study optimal policy responses to shocks in the mean and volatility of the external interest rate in a small open economy with an occasionally binding borrowing constraint. In the model, sudden stops in external financing arise endogenously and are accompanied with sharp declines in asset prices and consumption. We show that the modeled evolution of interest rates around episodes of sudden stops is consistent with the empirical evidence for a group emerging markets. We solve the problem of a benevolent social planner and show numerically that: (i) his policy is indeed contingent on the level and volatility of the external interest rate shocks, and (ii) the intensity of the planner's policy is non-monotonic with respect to the volatility of external shocks. We argue that the planner takes into account two factors to determine the size of his intervention: whether a sudden stop is likely to occur in the near future, and how large are the pecuniary externalities derived from the households' borrowing decisions.
"Macroeconomic Effects of Factor Misallocation: the Case of Mexico" Gaceta de Economía, ITAM, Vol. 16, No. 28. (in Spanish)
Awarded the 2010 Banamex National Prize in Economics (B.A. Thesis), and the 2010 Ex-ITAM Prize in Research (Economics)
Abstract: The per capita income gap between the US and Mexico is roughly 4 to 1, which is mainly explained by a productivity gap of about 3 to 1. Recent literature has found a significant role of factor misallocation in explaining cross-country differences in total factor productivity (TFP). We follow this literature, and explore how size-dependent distortions at the firm level affect factor allocation in Mexico, and how this translates in low levels of aggregate TFP. We use a neoclassical growth model with firm-level heterogeneity and a decreasing returns to scale technology in order to test the effect of size-dependent distorting policies on macroeconomic outcomes. We calibrate the model to match the size distribution of firms and labor productivity in Mexico using data from the 2004 economic census. We find that the long-run level of productivity can increase 93% with respect to the calibrated economy by eliminating the size-dependence of distortions, while keeping constant the total amount of rents generated by these. This follows from the fact that absent these distortions, capital and labor can be assigned to the firms where they have the highest marginal product, improving the output per unit of inputs. At the microeconomic level, the distribution of income improves because, even though the most skilled households’ managerial rents increase, a better allocation of labor and capital raises wages for the least skilled households.
Research in Progress
“Electricity Supply and Insurgent Violence in Iraq” with Andrew Shaver
Abstract: Did increased electricity supply during the recent Iraq war affect levels of insurgent violence? A growing body of literature seeks to assess the effectiveness of various economics-based approaches to counterinsurgency during the Iraq and Afghanistan conflicts. Evidence suggests that programs focused on satisfying local development requirements have been effective in reducing violence. The picture is far from complete, however, as only a subset of all of the programs carried out during these conflicts have been tested for their respective effects on violence levels. In particular, there has been no systematic study of whether major infrastructure revitalization projects affected the intensity of violence during either conflict. In this piece, we assess the effect on insurgent violence levels of increased electricity provision within Iraq. Existing counterinsurgency theories offer competing predictions over how insurgent violence should respond to increased power supply. We observe a reduction in levels of insurgent violence with increased supply and that such effect is greatest during summer months. Contrary to expectation, however, we find the greatest effect during the pre-Surge period and within Sunni areas of the country. Because the effect on violence is most pronounced amongst capital-intensive attacks, empirical results are consistent with the theoretical expectation that increased electricity supply bolsters the supply of actionable intelligence.