Path-Breaking Research

The Effects of Redistributive Taxation in Debt Constrained economies (with Dirk Krueger )
We explore the welfare consequences of different taxation schemes in an economy where agents are debt-constrained. If agents default on their debt, they are banned from future intertemporal trade, but retain their private (labor) endowments which are subject to income taxation. We impose individual rationality constraints on agents guaranteeing no default in equilibrium and we solve for efficient consumption distribution across agents. A change in the tax system changes the severity of punishment from default. We demonstrate that a change to a more redistributive tax system leads to a restriction of the set of contracts that are individually rational. In an economy that is characterized by uncertainty with respect to individual endowments, this restriction leads to a limitation of possible risk sharing via private contracts. The welfare consequences of a change in the tax system depend on the relative magnitudes of increased risk sharing forced by the new tax system and the reduced risk sharing in private insurance markets. We quantitatively address this issue by designing an artificial economy that is capable of replicating the joint income-consumption distribution observed in US panel data. We show that for a plausible range of the structural parameters of our model, the change to a more redistributive tax system leads to less risk sharing among individuals and, hence, lower ex-ante welfare.
Posted version: Coming soon
International Business Cycles with Endogenous Incomplete Markets (with Patrick Kehoe )
In earlier work on international business cycles Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995) and Stockman and Tesar (1995) found that standard models with complete markets generated cross country correlations of consumption that were much higher than in the data and cross correlations of output and factor inputs that were much lower that the data. This paper introduces a particular type of friction in the international credit market and assesses if it can quantitatively help to account for these anomalies. The friction is that international loans are not perfectly enforceable in that any country can renege on its outstanding debts and suffer the associated penalties on future borrowing. In this setup the allocations are constrained relative to the complete markets setting. We extend the methods of Marimon and Marcet (1992 and 1995) to solve for the equilibrium. Our findings are that these type of frictions, in contrast to the exogenous restriction on the asset markets, can go a long way in helping to resolve some of these outstanding anomalies in the data.
Posted version: February 1998
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Financial Autarky and International Business Cycle (with Jonathan Heathcote)
We describe and solve a two-country, two-good model in which there do not exist any markets for international trade in financial assets. We compare the predictions of this model to those of two other models, one in which markets are complete and a second in which a single non-contingent bond is traded. We find that the behavior of this class of models is sensitive both to certain parameter values and to the precise nature of the restrictions imposed on international asset trade. Nonetheless, we find that only the financial autarky model can generate volatility in the terms of trade similar to that in the data for floating rate period and, at the same time, account for observed cross-country output, consumption, investment and employment correlations.
Posted Vesrsion: December 1997
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Click here to download the figures (zipped pdf)
Persistent growth in an open economy
The Doctoral dissertation of Alessandra Fogli
Posted Version : March 1998 (In Italian)
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European Integration: an empirical analysis (With Marcello De Cecco)
Indices of intra-industry trade and commercial integration are calculated for EEC countries and it is shown how integration evolves in the last twenty years. The main findings are the industrial structure of "core countries " in the EEC is significantly different from that of peripheric countries and there is no evidence of convergence. Moreover a gravitation model shows a weakening of trade intensity between the center and the periphery of the EEC and a corresponding increase of the trade intensity among central and eastern European countries.
Moneta e Credito, 193, 89-121, Marzo 1996, (In Italian)
How does a fixed exchange regime work: the case of the Gold Standard.
An analysis of monetary policy and international monetary cooperation in the early years of the Gold Standard in a game theoretical framework.
Tesi Di Laurea, Universita' Bocconi, 1992 (In Italian)
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The Effects of Redistributive Taxation in Debt Constrained economies (with Dirk Krueger )

International Business Cycles with Endogenous Incomplete Markets (with Patrick Kehoe )

Financial Autarky and International Business Cycle (with Jonathan Heathcote)

Persistent growth in an open economy

European Integration: an empirical analysis (With Marcello De Cecco)

How does a fixed exchange regime work: the case of the Gold Standard.