Published papers
Productivity Shocks, Long-Term Contracts and Earnings Dynamics (With T. Lamadon, AER 2022)
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•AER
• Web Appendix
• Code
This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment.
We develop an equilibrium search model and characterize the optimal contract offered by firms.
Risk-neutral firms provide partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments
are backloaded in good times and frontloaded in bad times. The model is estimated on matched employer-employee data from Sweden.
Firms absorb persistent worker and firm shocks, with respective passthrough values of 26 and 10 percent.
We evaluate the effects of redistributive policies and find that 30 percent of government insurance is undone by crowding out firm insurance.
Working papers
The Employment Cost of Sovereign Default
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This paper analyzes the interaction between government default decisions and labor market outcomes in an environment with persistent unemployment and financial frictions.
Sovereign risk impairs bank intermediation through balance sheet effects, worsening the conditions for firms to pre-finance wages and vacancies.
This generates a new type of endogenous domestic default cost – the employment cost of default.
The persistence of unemployment produces serial defaults and rationalizes high debt-to-GDP ratios.
In the dynamic strategic game between the government and the private sector, anticipation effects allow the study of both debt crises and outright default episodes.
Introducing employment subsidies and bank regulations affect the government’s ability to commit to debt repayment.
Time-consistent Fiscal Policy in a Debt Crisis (With M. Ravn)
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We analyze time-consistent fiscal policy in a sovereign debt model.
We consider a production economy that incorporates feedback from policy to output through employment, features inequality through unemployment, and in which the government lacks a commitment technology.
The government's optimal policies play off wedges due to the lack of lump-sum taxes and the distortions that taxes and transfers introduce on employment.
Lack of commitment matters during a debt crisis – episodes where the price of debt reacts elastically to the issuance of new debt.
In normal times, the government sets procyclical taxes, transfers and public goods provision but in crisis times it is optimal to implement austerity policies which minimize the distortions deriving from default premia.
Could a third party provide a commitment technology, austerity is no longer optimal.
Expectation-driven Bond Pricing with Dynamic Private Sector Behavior
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This paper outlines a novel source for multiple equilibria in sovereign default models.
In the model, multiplicity arises due to the presence of employment as an additional and privately determined state variable.
If unemployment impacts on the default decision and its evolution depends on sovereign borrowing costs, an economy becomes prone to expectation-driven crises, rendering sovereign debt markets vulnerable to market panics.
Pessimistic investors' expectations about default hike sovereign borrowing costs, which translates into higher unemployment and increases the likelihood of a sovereign default, validating the investors' adverse expectations.
Three-state multiplicity emerges with neither changing the standard first-mover advantage of the government in the game with investors nor its limited commitment and thus is useful to study fundamental and expectation-driven default crises in a unified framework.
The paper shows that policy makers may be able to break bad expectations and increase welfare with repayment guarantees from supranational agencies or fixed floors on debt prices.
