Department of Economics
University of Pennsylvania
445 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
NBER Program Affiliations:
NBER Affiliation: Faculty Research Fellow
NBER Working Papers and Publications
|October 2017||Fiscal Rules, Bailouts, and Reputation in Federal Governments|
with Rishabh Kirpalani: w23942
Expectations of bailouts by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can correct these incentives to overborrow when central governments cannot commit and if these rules will arise in equilibrium. We address these questions in a reputation model in which the central government can either be a commitment or a no-commitment type and the local governments learn about this type over time. We find that if the central government's reputation is low enough, then fiscal rules can lead to even more debt accumulation relative to the case with no rules. This is because the punishment for violating the fiscal rule worsens the payoffs of preserving reputation. Despite being welfare reducing, binding fiscal rules will arise in the equilibr...
|September 2016||Self-Fulfilling Debt Crises: A Quantitative Analysis|
with Luigi Bocola: w22694
This paper uses the information contained in the joint dynamics of government’s debt maturity choices and interest rate spreads to quantify the importance of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk averse lenders and self-fulfilling rollover crises á la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by economic fundamentals and by expectations of future self-fulfilling defaults. These two sources of default risk have contrasting implications for the debt maturity choices of the government. Therefore, they can be indirectly inferred by tracking the evolution of the maturity structure of debt during a crisis. We fit the model to the Italian debt crisis of 2008-20...
|January 2016||Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity|
with Mikhail Golosov, Ali Shourideh: w21948
We study optimal fiscal and redistributive policies in an open economy without commitment. Due to its redistributive motives, the government’s incentive to default on its external debt is affected by inequality. We show that in equilibrium the economy endogenously fluctuates between two regimes. In the first regime, the government borrows from abroad, spends generously on transfers and keeps the inequality low. In the second regime, it implements austerity-like policies by cutting transfers, reducing foreign debt and increasing the inequality. The equilibrium dynamics resembles the populist cycles documented in many developing countries.