Publications

This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the impact of bailouts on sovereign default risk and political turnover. We consider a small open economy in which the government has access to official loans conditional on the implementation of austerity policies. There is a two-party system in which both parties care about the population’s welfare but differ in an exogenous utility cost of default. Political turnover is the endogenous outcome of the individual voting behavior. In a quantitative exercise we apply the model to Greece and find that bailout episodes are characterized by an increased risk of political turnover. In the short run, stricter conditionality raises the risk of sovereign default because it reduces the participation rate in bailout programs. In the long run, however, stricter conditionality limits the accumulation of debt which lowers sovereign default risk. We show that the frequency of political turnover is U-shaped in the strength of conditionality.

This paper investigates how upward mobility affects legislator voting behavior towards education policies. We develop an electoral competition model where voters are altruistic parents and politicians are office seeking. In this setting the future economic status of the children is affected both by current public education spending and by the level of upward mobility. Using a newly compiled dataset of roll call voting on California education legislation matched with electoral district-level upward mobility we find that the likelihood of a legislator voting "no" on redistributive education bills decreases by 10 percentage points when upward mobility in his electoral district decreases by a standard deviation.

We integrate banks and the coexistence of bank and bond financing into an otherwise standard New Keynesian framework. There are two policy-makers: a central banker, who can decide on short-term nominal interest rates, and a macroprudential policy-maker, who can vary aggregate capital requirements. The two policy instruments can be used to stabilize shocks, to moderate bank credit cycles, and to induce a more efficient allocation of resources across sectors. Moreover, we investigate the optimal combination of simple policy rules for interest rates and capital requirements. The optimal policy rules imply that the central bank should focus exclusively on price stability and the macroprudential policy-maker should react exclusively to changes in loan rate premia.

There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses.