Working PapersAbstract: Over the past thirty years, the share of young firms in the US has declined while the share of profits in GDP has increased. This paper explores the role of
consumer inertia—persistence in households’ consumption choices—as a driver of these twin phenomena. The hypothesis is that more consumer inertia makes it more difficult for entrants to establish a customer base and incentivizes large incumbents to raise markups. First, I use detailed micro data to document that consumer inertia has increased over time due to the aging of the US population. Second, I show that there is a negative relation between consumer inertia and firm formation using empirical evidence across product categories and across US states. Finally, I develop a model of entry, exit, and firm dynamics with consumer inertia. I calibrate the model using my micro estimates of consumer inertia and data on firm dynamics. According to the model, the rise in consumer inertia accounts for a substantial proportion of the twin phenomena.Lags, Costs, and Shocks: An Equilibrium Model of the Oil Industry
[April 2019]with Per Krusell and Sergio Rebelo Abstract: We use a new micro data set that covers all oil fields in the world to estimate a stochastic industry-equilibrium model of the oil industry with two alternative market structures. In the first, all firms are competitive. In the second, OPEC firms act as a cartel. This effort is a first step towards studying the importance of ongoing structural changes in the oil market in a general- equilibrium model of the world economy. We analyze the impact of the advent of fracking on the volatility of oil prices. Our model predicts a large decline in this volatility. A Continuous Time Model of Sovereign Debt
[March 2018]Abstract: I construct a continuous time model of strategic default and provide a numerical algorithm that solves it. I compare the results and computation times to standard discrete time models of sovereign debt. The proposed method is faster than discrete time computation methods while obtaining similar quantitative results. The few differences between the two models can all be attributed to the fact that deleveraging is more costly in continuous time. I solve three variants of the model. The first includes short term maturity bonds only and a constant risk-free interest rate. The second allows for stochastic fluctuations in the risk-free rate. Finally, I extend the model to allow for long term maturity bonds.
PublicationsQuantitative Sovereign Default Models and the European Debt Crisis
with Luigi Bocola and Alessandro Dovis Journal of International Economics, May 2019Abstract: A large literature has developed quantitative versions of the Eaton Gersovitz (1981) model to analyze default episodes on external debt. In this paper, we study whether the same framework can be applied to the analysis of debt crisis in which domestic public debt plays a prominent role. We consider a model where a government can issue debt to both domestic and foreign investors, and we derive conditions under which their sum is the relevant state variable for default incentives. We then apply our framework to the European debt crisis. We show that matching the cyclicality of public debt—rather than that of external debt—allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics. Moral Hazard Misconceptions: The Case of the Greenspan Put
with Guido Lorenzoni IMF Economic Review, June 2018Abstract: Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does
not intervene by monetary easing following a crisis, this creates an aggregate demand externality that makes borrowing ex ante inefficient. If instead the central bank follows the optimal discretionary policy and intervenes to stabilize asset prices and real activity, we show examples in which the aggregate demand externality disappears, reducing the need for ex ante intervention. |